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Author Topic: [-] loss on bought aircraft  (Read 498 times)

Offline meiru

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[-] loss on bought aircraft
« on: January 30, 2014, 10:28:19 PM »
sorry that I come with this again... but to me it seems wrong how it is

following situation:

you have to replace an aircraft and can't get a new one on the market (or only too late) ... so what do you do? you go to the UM... there you find an aircraft, that has exactely what you need... and it's even brand new!! but, the price is 115M ... if you would take it new, you would pay 100M ... so ... now you buy it. Why do you take this as 115M aircraft into you books? You have to directly write it down to 100M ... because that's the correct value. ... so it's possible to make a loss when you buy an aircraft ... wheras I think it's also possible to make a profit when buying one ... if the aircraft is sold by an airline in trouble for only 50M ... but the value is 100M ... shouldn't it be seen as profit??
« Last Edit: January 30, 2014, 10:42:35 PM by sami »

Offline Sami

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Re: loss on bought aircraft
« Reply #1 on: January 30, 2014, 10:42:30 PM »
The initial book value is what you originally paid for it, that's the correct way accountingwise.


(The aspects of re-valuation etc have been already talked previously)

Offline meiru

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Re: [-] loss on bought aircraft
« Reply #2 on: January 30, 2014, 10:54:24 PM »
I know, but I searched for that again and... In my teaching book about accounting I found the sentence, that this is only the fact, if the price was "appropriate" and that you have to book the "inappropriate or overpayed/underpayed amount" otherwiese.

I'm really curious about that... if that's interessting for you too, I can ask our tax authority how they see it... *hmm* ... maybe I really do that... I really want to know that

Offline Infinity

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Re: [-] loss on bought aircraft
« Reply #3 on: January 30, 2014, 10:55:31 PM »
sorry that I come with this again... but to me it seems wrong how it is

following situation:

you have to replace an aircraft and can't get a new one on the market (or only too late) ... so what do you do? you go to the UM... there you find an aircraft, that has exactely what you need... and it's even brand new!! but, the price is 115M ... if you would take it new, you would pay 100M ... so ... now you buy it. Why do you take this as 115M aircraft into you books? You have to directly write it down to 100M ... because that's the correct value. ... so it's possible to make a loss when you buy an aircraft ... wheras I think it's also possible to make a profit when buying one ... if the aircraft is sold by an airline in trouble for only 50M ... but the value is 100M ... shouldn't it be seen as profit??

Assets in real life are always activated at the cost of purchase, so it is correct to activate it at 115m.

Offline dmoose42

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Re: [-] loss on bought aircraft
« Reply #4 on: January 30, 2014, 10:56:21 PM »
i'm not sure i understand you.  why is 100m the 'correct' value - the value of the plane was just established at 115m.  There is no need to write it down the asset to 100m because the market value is 115m.

Offline meiru

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Re: [-] loss on bought aircraft
« Reply #5 on: January 30, 2014, 11:01:09 PM »
I see the point... but I'm not sure if it's correct... it's correct, if the price is "appropriate" ... no question... but if the price is stupidly low or high... that's the point I'm not sure about...

I only have it in german...

Sind die Anschaffungskosten unangemessen, d.h. zu hoch oder wurde die Anschaffung eines bestimmten Fahrzeugs z.B. hauptsächlich aus privatem Interesse getätigt, so sind im Zusammenhang mit der jährlichen Abschreibung nur die angemessenen Anschaffungskosten über die Nutzungsdauer zu verteilen.
« Last Edit: January 30, 2014, 11:05:04 PM by meiru »

Offline dmoose42

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Re: [-] loss on bought aircraft
« Reply #6 on: January 30, 2014, 11:34:50 PM »
I think Sami would make the case that 'stupidly' high or low is prevented by the limits set by the system.  Therefore, all allowable prices are 'appropriate'. 

On some level it doesn't matter because even if you buy a plane for 2x the stated value, now your depreciation expense is twice as high.  It's just a question or whether that amount is depreciated over time, or allowed as an immediate write-off.

BD

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Re: [-] loss on bought aircraft
« Reply #7 on: January 31, 2014, 04:24:44 AM »
The issue is called "mark to market".  Since 2008, it has been a controversial issue for financial industry / banks (i.e. the value of their loan portfolio, or mortgage based securities - if they had marked them to their then market value the thinking/fear goes that many banks would collapse, and they are still not out of the woods on that yet).

Theoretically, meiru has a valid point.  http://en.wikipedia.org/wiki/Mark-to-market_accounting  But it is not unlike the cash accounting vs gaap accounting issue.  When does one recognize the "hit"?  In one shot immediately, or over time as heightened depreciation expense - as dmoose mentioned?

The trouble is adding that layer of detail / complexity would reduce player understanding and would probably be a challenge to implement.  As the debate shows here, it would never be settled what the "true" market value is, with players arguing for their most advantageous interpretation.  

Depending on most definitions, it would be a moving target and would require adjustments up and down...potentially very confusing.  

In the end, that amount of realism may actually hurt the game playability, and the game community IMHO.

Besides, it appears that this is attempting to address a symptom of a different problem.  Effort and resources might be better spent on the core cause(s) of the price imbalances.
« Last Edit: January 31, 2014, 04:27:41 AM by BD »

Offline dmoose42

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Re: [-] loss on bought aircraft
« Reply #8 on: January 31, 2014, 04:32:54 AM »
agree - it is impossible to determine what the fair price for a plane is.  If we are starting from the premise that the price paid in the UM is not fair value then it is surely an impossible task.

If we take all the pricing data from the UM, you could probably construct a model that produces a fair value curve that would change with each new sale, but as BD said, it seems like a lot of work for not a whole lot of benefit.

Offline schro

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Re: [-] loss on bought aircraft
« Reply #9 on: January 31, 2014, 05:22:49 AM »
The other thing to consider is that companies tend to carry two sets of books - one based on GAAP (what is being discussed conceptually in this thread) and the other one based on tax. For example, a plane might get straight line depreciation on the GAAP books, but MACRS on the tax books.  For simplification purposes, the new AWS accounting methods tend to be a bit of a hybrid between GAAP and tax accounting which tend to add a little confusion to the mix.

From a GAAP perspective, the over payment for a plane would be booked as asset + goodwill (intangible asset),then the goodwill will be tested for impairment on a periodic basis, and if it fails the test, it becomes an expense at that time. Regardless of this, for tax depreciation, the value starts at what you paid for it and is reduced from there.

 

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