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Author Topic: Balance sheet liabilities  (Read 490 times)

Offline Sami

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Balance sheet liabilities
« on: February 15, 2014, 07:47:55 PM »
I think that the liabilities side on balance sheet should include a few more items .. Seemed to have missed those since the balance sheet was the list item worked of the three

- Liabilities of future (new) aircraft deliveries (ie. if not 100% downpayment for owned aircraft, what are your upcoming total payments)

- Liabilities of current/future leases (the minimum cost to get rid of each of your leased planes, in operation or in on order, for both new and used leased planes). However since they are operating leases (not financial) it can be argued that it shouldn't be on the balance sheet. However in any case you are still liable for at least the termination cost, or the cost of the monthly leases till the end of the lease...

- (edit)  Fuel contracts; here same too as in leases - minimum possible liability is the termination fee so calculated based on that


(what else?)


Since this affects quite much on the total company "value", this change too would be rolled in gradually. In other words only all aircraft ordered/delivered after the implementation would be counted there.
« Last Edit: February 15, 2014, 08:48:43 PM by sami »

Offline LemonButt

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Re: Balance sheet liabilities
« Reply #1 on: February 15, 2014, 08:36:00 PM »
Fuel Contracts?

Offline schro

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Re: Balance sheet liabilities
« Reply #2 on: February 15, 2014, 09:50:59 PM »
I'm going to have to strongly disagree on many of the items here.

First, with regards to lease  termination fees and fuel contract termination fees - from an accounting perspective, they are only considered to be liabilities if you expect to owe the payment. In most cases, it is reasonable to assume that the airline plans on running the full course of the contract. At the point the decision is made to discontinue the fuel contract or lease contract, an expense should be recorded and matched with that as a liability, then the next transaction will be cash paid to reduce that liability to zero. However, in AWS, the decision to terminate and the cash payment happen at the same time, therefore, no liability should be created.

With regards to future aircraft purchases, that makes sense, but that also means you'll have to record the full book value of the purchase to make things balance. (i.e. don't go recording liabilities without offsetting it properly).

As for operating leases, the current FASB standard says they're not liabilities, however, there is a movement within the international community to make them into liabilities. So, for now, I think it reflects reality properly.


Offline Sami

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Re: Balance sheet liabilities
« Reply #3 on: February 15, 2014, 10:31:23 PM »
For leases, and fuel fees as well, you are liable to pay either the contract/lease fee in full over the course of the contract/lease OR the termination fee. Didn't suggest that we'd have both of them of course.

Of course the assumption would be to use it for the entire duration but that would make quite large sums there, so that is why the minimum possible amount (termination fee) that you can be liable for the owner would make sense over those two options.

Offline LemonButt

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Re: Balance sheet liabilities
« Reply #4 on: February 15, 2014, 10:35:19 PM »
For leases, and fuel fees as well, you are liable to pay either the contract/lease fee in full over the course of the contract/lease OR the termination fee. Didn't suggest that we'd have both of them of course.

IMO it would only make sense to add these future liabilities if future revenues were also included.  IRL airlines get cash up front for flights happening in the future, which are technically also a liability, but the net result is neutral since assets go up by the same amount.  That future revenue lines up with the future liabilities as far as allocating them to appropriate days/weeks, so if you say I have $10 million in liabilities, it is against the $50 million in cash prepayment I recieved for selling tickets.  Then it gets even messier because those future liabilities would be against a discounted cashflow model.  I hope that all makes sense as I feel I'm not explaining it well at all...

Offline Sami

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Re: Balance sheet liabilities
« Reply #5 on: February 18, 2014, 09:58:53 PM »
A quick discussion with an accountant, and yes the lease / contract liabilities are not directly in the balance sheet itself but rather as an attachment / annex to it. Liabilities for purchased planes' delivery payments  can be in balance sheet.

 

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