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Author Topic: [-] Book Value  (Read 1303 times)

dancingcol

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[-] Book Value
« on: January 02, 2014, 01:21:55 PM »
Hi Sami,

Odd things happening with Book Value for some of my MRJ 90ER's in Asia Challenge

my most recent deliveries seem to be significantly under the purchase price before discounts;

MSN 763 $32.9m
MSN 761 $32.8m
MSN 759 $32.8m etc...

The odd thing is an older one is worth significantly more;
MSN 747 $55.2m

Please can this be investigated

Colin
« Last Edit: January 02, 2014, 01:27:34 PM by sami »

Online Sami

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Re: Book Value
« Reply #1 on: January 02, 2014, 01:27:28 PM »
The one delivered on 09-Aug-2025 (MSN #761) has prices as follows:
On order 6 604 430 USD.
On delivery 26 417 730 USD.

=> total payments 33022160 USD (~$33mil), which is the initial book value.

Checked from a/c details page ( http://www.airwaysim.com/game/Aircraft/My/View/16435/ ) and it has current value in books of $32.8mil, so looks just fine to me considered that the plane has been in use only for a while.

However any older planes you have that have been delivered before the update was live have the 'initial' book value calculated from the old data/systems so it will vary from the new ones in some cases (and especially in the modern era where inflation had too big effect in the old calculation). This transition has been mentioned in the change log of the updates and is the only way to make the transition without any major jumps in the company value.

Offline meiru

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Re: [-] Book Value
« Reply #2 on: January 02, 2014, 01:38:32 PM »
but the old way of calculating the book value was the correct one... that one you use now is wrong... in your books you have the value of the aircraft, not what you payed for

what we should have is, that we should be allowed to select the value by which the book value is decreased every week (by selecting a time by which the aircraft is payed off) ... that's how it really should work... and then the selling price should be relatet to this... so, e.g. you have an airliner for 16 years and you selected that you want to pay it off by 16 years (should be allowed, maybe even down to 12 or so) ... then you could sell it for 1$ after this time... if you want

all other systems are... I don't know... a little bit... let's say, not a good simulation

Online Sami

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Re: [-] Book Value
« Reply #3 on: January 02, 2014, 01:42:29 PM »
No, the book value initially is exactly what you have paid for it, and you'll then depreciate it over time (on balance sheet you'll have the original cost and depreciation allowance .. depending a bit how the UI will work, still thinking the best way to display it). The asset's value cannot magically increase on the day you receive it compared to what you paid for it (apart from the case on next chapter). The old method of a/c value calculation had nothing to do with real accounting.    (..or did I miss the point here now?)

However - over time (/ when needed), you CAN (but you are not required to; to my knowledge) revaluate the asset to bring its balance value on line with "fair value". But determining this "fair value" is not simple. And like I said it's not really mandatory, but can be done if needed. However for AWS purposes this gets complicated, and would add several accounts to the balance sheet. But indeed, if the period between order and delivery is very very long then a revaluation could be in order (but wrong thread for that; any ideas for that to the feature rq thread of accounting please).
http://www.kpmg.com/Global/en/IssuesAndInsights/ArticlesPublications/Documents/components-of-aircraft-acquisition.pdf
http://en.wikipedia.org/wiki/Revaluation_of_fixed_assets

And also I do know that the depreciation period does vary between airlines, it's commonly between 15-30 years. For purposes of AWS and keeping it simple, a single and same method for everyone was chosen, and that is 25 year useful life period. Having many different depreciation periods doesn't really gain any significant advantage. It isn't technically impossible even with the current structure, but really cannot see any major advantage of it (for now at least, let's see later when the new accounting gets going first).


add/  One additional link too: http://pages.stern.nyu.edu/~adamodar/New_Home_Page/littlebook/assetvalue.htm     ..second chapter 'Accounting Principles Underlying Asset Measurement'
« Last Edit: January 02, 2014, 02:07:44 PM by sami »

dancingcol

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Re: [-] Book Value
« Reply #4 on: January 02, 2014, 02:03:25 PM »
so does this new book value not take into account that the aircraft is worth more because of the initial 15% ish (or however much it was) discount on ordering?

Online Sami

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Re: [-] Book Value
« Reply #5 on: January 02, 2014, 02:14:27 PM »
so does this new book value not take into account that the aircraft is worth more because of the initial 15% ish (or however much it was) discount on ordering?

No, but if you will sell the aircraft, you will see the benefit there. For example this MRJ costed you $33million, and currently your staff recommends to sell it at ~$50mil .. (which is actually a bit too much compared to the respective new a/c price off the production line .. may have to adjust that price recommendation still further)

However (like mentioned) including these assumed changes in the value to the balance sheet makes it complicated. Since the fair market price suggestion is only a guess, and the true fair value of the aircraft is hard to determine (haven't found a source that would be applicable for this industry, for revaluation). And also the original purchase cost ("historical cost") should be the basis of valuation for fixed assets. (ref. previous post's last link for example)
« Last Edit: January 02, 2014, 02:24:25 PM by sami »

Offline meiru

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Re: [-] Book Value
« Reply #6 on: January 02, 2014, 04:23:19 PM »
(..or did I miss the point here now?)

I think yes... I did learn that differently. To make an example... somebody buys an object for 1M (car, house, aircraft, not so important what it is) ... then this doesn't change your wealth. You still have the same value and you still have to pay the same taxes (that's why I know that very well... it's all about taxes  ;D).
Now, given the fact that your model is correct, you could do this -> sell it for 1$ to ... your mother (as an example) and book a -1M (ok, -999999$) as loss... then, nobody has to pay taxes anymore. And after that, your mother sells it back to you for 1$ (or 2 ... whatever) ... now you changed the book value completely and that's not correct... do this and you'll get a lot of trouble with the tax guys... believe me...  ;D

So, the book value is the value of the asset... and (for houses and so on) it's damed difficult to change the book value without big trouble with those tax guys. And when you buy a new house, the book value could be much higher sometimes... they come and set a price for it and you should/have to use this price in you books then... sometimes you can try to talk to them... but... I know that... even houses without value (for us) have to remain in the books with a huge value (too often I think...).
« Last Edit: January 02, 2014, 04:25:28 PM by meiru »

Offline schro

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Re: [-] Book Value
« Reply #7 on: January 02, 2014, 04:36:43 PM »
but the old way of calculating the book value was the correct one... that one you use now is wrong... in your books you have the value of the aircraft, not what you payed for


Actually, I think you just don't understand accounting principles. The main principle to understand is that Assets = Liability + Equity. Equity gets moved by income and expenses. Therefore, if you buy a plane with cash, you are trading cash (an asset) for a plane (an asset) and it is placed on your books at that cost. It does not touch the right side of the equation. Now, if you were to mark the value of the plane to market, that means assets increased, therefore, either liabilities or equity must increase in order for "the books" to stay in "balance" (meaning Assets = Liability + Equity). Since you're not taking out a loan for that amount, it means equity needs to go up, which implies that you are booking a profit at that time. If you book a profit on the purchase of an aircraft (which is not logical), then you get to pay tax on that amount (which you'd get butthurt over).

In all your discussions about tax value, that is a totally separate value and calculation that has nothing to do with accounting and everything to do with the government getting its sticky hands in your pocket using any tool that they have available...

Offline dmoose42

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Re: [-] Book Value
« Reply #8 on: January 02, 2014, 04:50:57 PM »
schro - clearly you need to get an accountant to help you avoid taxes like meiru does... :P

Offline meiru

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Re: [-] Book Value
« Reply #9 on: January 02, 2014, 05:03:27 PM »
of course it's not that easy... and it makes a difference, if you're a company or a person ... but in Switzerland, you have to pay tax on the value of all your assets (as a person) and if you buy a house, you have to pay the tax according the value of the house and not the price you payed ... and when you sell it for a higher price (later), you also have to pay tax on this difference

so, it's not that easy to say, that it doesn't have any value anymore

for companies, that's different... but if you take the value out of your books and you try to create a loss like that, it won't work ... it's not clear what will happen (that's always with law), but it's very likely, that it will be seen as some illegal action ... this could be otherwise an idea to get your balance down to 0 every year... simply take out the value of your books


oh and... if the "tax value" and the "real value" should be different... I don't know... does this work? Do you have 2 different kind of bookkeepings? One for the tax and an other for the real values?
« Last Edit: January 02, 2014, 05:08:25 PM by meiru »

Offline LemonButt

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Re: [-] Book Value
« Reply #10 on: January 02, 2014, 05:16:17 PM »

oh and... if the "tax value" and the "real value" should be different... I don't know... does this work? Do you have 2 different kind of bookkeepings? One for the tax and an other for the real values?


Tax value is "book value" and what is used to determine taxes and other accounting matters.  It is nearly always lower than actual value, otherwise there would be huge lines of people petitioning to get their assets reappraised/valued to get a lower tax rate.  Real value is tricky because assets are only worth what someone is willing to pay for them.  I can say my house is worth $1 million, but if the highest bidder is only willing to pay $100k then the real value is $100k.  A good example is the housing crisis--lots of overinflated appraisals (i.e. book value) where the real value is considerably lower.

Offline meiru

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Re: [-] Book Value
« Reply #11 on: January 02, 2014, 05:22:44 PM »
... and the question now is, can the one who bought the house for 100k now put it as 100k value in it's books or not. I say no... if he can't show, that this is the real value. But, it may be a mix of it... maybe he doens't have to take the 1M price, but... maybe 800k ? ... so ... it may be, that the sale can be used for a correction of the value
« Last Edit: January 02, 2014, 05:27:51 PM by meiru »

Offline LemonButt

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Re: [-] Book Value
« Reply #12 on: January 02, 2014, 05:31:51 PM »
... and the question now is, can the one who bought the house for 100k now put it as 100k value in it's books or not. I say no... if he can't show, that this is the real value.

Since you don't pay property tax in AWS it doesn't matter.  The issue in AWS is amortizing those expenses versus taking a lump sum hit as they are capital expenses.  IRL real value, if you were to get an insurance policy on the house for example, is based on replacement cost.  If the house burnt to the ground and it only cost $100k to rebuild it, then it would be a $100k house.

Offline meiru

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Re: [-] Book Value
« Reply #13 on: January 02, 2014, 05:39:48 PM »
but we have the company value and this is a factor for your game achievements !

Offline dmoose42

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Re: [-] Book Value
« Reply #14 on: January 02, 2014, 05:44:38 PM »
I don't know why you are so attached to the older valuation methodology.  It is likely that the prior method overstated the real value of older planes, which is why 30,000 of them fester for eons on the UM.  If you want to realize the perceived value of your planes that are woefully undervalued, feel free to put them on the UM and get someone to buy them to unlock that value. 




Offline meiru

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Re: [-] Book Value
« Reply #15 on: January 02, 2014, 06:29:26 PM »
the calculation of the value was always too high... that's true... but I don't see why you want to correct this by using an other book value

do you want to keep the aircraft price high, but having them in the books for much less? ... that's something that doesn't make sense to me ... except... if you try to "solve" to overrated value problem plus try to keep the sales prices high, so that nobody can easily buy a lot of aircrafts... but... ok... I got it now... you try to fix a problem with a new problem... that's it... ok, so from that standpoint...

but... is it really solving the problem? ... couldn't we cross-sale aircrafts for a too high price (at least a bit higher than the real value) to overcome this? ... if I exchange an airliner with somebody else... and we both sell them for 120% of their value (both sell a DC-10 at 70M e.g.) ... we have not lost any money, but we both have a higher book value, because they initially had a book value of something around 60M ...

Offline dmoose42

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Re: [-] Book Value
« Reply #16 on: January 02, 2014, 06:37:54 PM »
The main objective of the change is replace the completely inaccurate historical way of deducting the full value of a plane from current year taxes and replacing it with a book value that will depreciate over time.  You are right that no method is perfect, but there is also no fair value as what people are willing to pay for planes changes substantially from period to period depending on the demand.

As for gaming the system, you could cross-sell the planes to artificially inflate the book value, but this would lead to higher depreciation costs as well, reducing profitability.  You could say that this will lower one's tax bill so why wouldn't you do this?  Because you have real cash out the door to buy the plane for extra value - you can't recoup that without collusion.  You are causing losses just to reduce taxes.  Doesn't make much sense from a profitability perspective, although your CV will temporarily increase.

Offline LemonButt

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Re: [-] Book Value
« Reply #17 on: January 02, 2014, 06:39:19 PM »
Company value is arbitrary and it only affects game achievements and credit line.  What book value does is allow you to depreciate an asset over time, which is what every business in the world does with capital expenses.  Instead of paying $100 million in Year 1 and taking a $100 million expense, you would take a $5 million expense in Year 1, Year 2, etc.  Using an accrual versus cash based accounting system also allows you to book pre-payments as an asset.  So if you spent $200 million on an aircraft order, your CV would remain the same, but your cash would go down $200 million as the prepayments are an asset.  This keeps companies with $200 million in profit from making a $200 million prepayment and paying taxes on $0, which is the root cause of many problems in AWS.

IRL assets end up being depreciated to zero, despite the fact they still have some value greater than zero.  One of my professors in graduate school used to tell us to buy expensive stuff for your office so you can depreciate them and take them home to furnish your own house when you're done depreciating them as home furnishings aren't tax deductible, but office furnishings are.


Offline meiru

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Re: [-] Book Value
« Reply #18 on: January 02, 2014, 06:49:36 PM »
Because you have real cash out the door to buy the plane for extra value

nope... sell it to an alliance member with the same "problem" and he sells me his airplane (for the same price, but too high) ... both get a higher CV, thus a higher depreciation, thus pay less taxes over time and... I don't know what other advantages they could get from the higher CV ... take out more loan maybe? ... maybe get a bether rating? ... don't know how that works

Offline meiru

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Re: [-] Book Value
« Reply #19 on: January 02, 2014, 06:50:07 PM »
The main objective of the change is replace the completely inaccurate historical way of deducting the full value of a plane from current year taxes and replacing it with a book value that will depreciate over time.

that's something I fully support!

 

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