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Author Topic: Great job with the accounting changes  (Read 875 times)

Online JumboShrimp

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Great job with the accounting changes
« on: May 27, 2014, 07:27:16 PM »
After being away for a few months, coming back, and using the updated system, I have to say: Great Job!

I saw the early versions, contributed a little to the discussion.  It came together very nicely.  I love all the aspects of the new GAAP like accounting, new taxation method, ability to drill down, long weekly history etc.

The operational part of income statement makes it easier for new airlines to see where they stand.

Overall, I think AWS is a good learning tool for anyone unfamiliar (but interested in) accounting / finance of medium to larger companies, students etc.

Offline AUpilot77

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Re: Great job with the accounting changes
« Reply #1 on: May 27, 2014, 07:33:52 PM »
I was thinking the same thing.  I took two accounting classes a few years back and seeing these new terms included in AirwaySim is bringing back the things that I learned. 

Offline LemonButt

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Re: Great job with the accounting changes
« Reply #2 on: May 27, 2014, 08:48:19 PM »
The only beef I have is when you narrow it down by base.  Since certain costs (marketing, alliance fees, staff training, aircraft storage) are always assigned to your HQ versus prorated, the result is that your HQ is always bleeding red and your bases are profitable.  Thus, you have no idea whether a base is profitable or not and whether you should keep it open.  Other than that, yea it's good :)

chris.abrams67

  • Former member
Re: Great job with the accounting changes
« Reply #3 on: May 29, 2014, 12:50:12 PM »
Hi. First time post.

I'm really enjoying the game (GW4) but I do just have bit of confusion with the accounting.

I don't understand why slots are treat like they are. I read through the archive posts on the run up to the changes and I still don't really understand why they are treated as an asset not an expense.

While I can see that they are an asset in as much as, it is an asset that allows me to operate, it distorts the value of my airline because they have no intrinsic value. They cannot be sold (in this game). While they should be on a RL airline's Balance Sheet, because they can be sold (and will change in value).

As they are worth nothing, they should be written down to 0 immediately, or just expensed. They give the impression that the airline has more assets than they do. An investor in my airline might look at it and think the airline is worth 20% more than it is because they can't get their hands on the assets. If the AL was to go bust, while the aircraft could be sold to pay down debt and anything left distributed to s/holders, the slot value can't.

Or, if you had an airline based at LHR that was historically very good, had lots of slots, but then mis-managed itself, in the game it would go pop. In reality it would be able to downsize, sell some of it's slots (i.e. realise some of those assets) and pay down its debt. Now, while slots aren't traded in AWS, that couldn't happen, but it does highlight the issue of overvaluation.

I think it distorts the the value of the AL for no benefit at all.

I also like to value my airline on an EV/EBITDA basis (ROCE). It shows how much return is generated by all of the capital (Shareholders and Banks) and how efficient I am. This accounting treatment understates that as it assumes I'm getting the same return off a capital base that isn't as big as the accounts assume.

And, while I'm at it - I know in the statistics area it publicly shows a Margin, could we also include an EV/EBITDA. The margin just shows how successful (or not) I am at turning my turnover into profit. I would like to compare my ability to turn all the capital I use into profit. Then I can compare myself as a small/medium AL against the Mega Airlines. If I turn my 25m assets into a profit of 2.5m then I'm better at handling my resources than a company with 25bn assets employed that turns a 1bn profit. (Can't do this at the moment because of aforementioned slots issue)

It's another way of measuring apples with pears.

(This post is in no way prompted by the fact that when I'm route planning (trying out different times etc) I quite often forget to press the "Don't buy slots" tab and end up with hits to balance sheet and P&L further down the line!  :'( Could we have a sandbox for route planning that only sends it when we're ready to go. (And yes, I know there's the "Confirm" button at the bottom.)


Online Infinity

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Re: Great job with the accounting changes
« Reply #4 on: May 29, 2014, 12:58:52 PM »
You look at this far too realistically. You can take real world terms for the accounting in this game, but don't expect it to behave like the real world. Just look at the equity/debt ratio of most airlines, especially the fast growing ones. Completely beyond reality.

Offline Sami

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    • AirwaySim - Are you the next Richard Branson?
Re: Great job with the accounting changes
« Reply #5 on: May 29, 2014, 01:48:55 PM »
I don't understand why slots are treat like they are. I read through the archive posts on the run up to the changes and I still don't really understand why they are treated as an asset not an expense.

This was discussed throughly in the development phase of the new accounting system. (airlines in these days are gradually starting to value the airport rights too, but it's a mixed field still. One approach for that was chosen here.)

More accounting stats / values will be added in the future but for now it's not on any "to-do list" since there are other major things to work on, and the accounting was only recently updated.
« Last Edit: May 29, 2014, 01:51:10 PM by sami »

Offline LemonButt

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Re: Great job with the accounting changes
« Reply #6 on: May 29, 2014, 02:38:33 PM »
It sounds like you have a background in accounting (or venture capital lol).

I don't understand why slots are treat like they are. I read through the archive posts on the run up to the changes and I still don't really understand why they are treated as an asset not an expense.

While I can see that they are an asset in as much as, it is an asset that allows me to operate, it distorts the value of my airline because they have no intrinsic value. They cannot be sold (in this game). While they should be on a RL airline's Balance Sheet, because they can be sold (and will change in value).

As they are worth nothing, they should be written down to 0 immediately, or just expensed. They give the impression that the airline has more assets than they do. An investor in my airline might look at it and think the airline is worth 20% more than it is because they can't get their hands on the assets. If the AL was to go bust, while the aircraft could be sold to pay down debt and anything left distributed to s/holders, the slot value can't.

Slots are an asset for a few reasons.  In regards to game mechanics, some players pay $20k for a set of slots and others pay $20 million depending on where they are based.  By converting those slot costs to an asset, you can get compare company values much better.  Additionally, since they are an asset they are paid for with post-tax dollars and are not written off as a deductible expense.  Slots are intangible assets and are rights to takeoff/land.  Coca-cola's brand is an intangible asset that cannot be sold/transferred piecemeal, just like slots, but carries a huge value.  Slots are in the same category as it is an asset that allows the company to operate.

Quote
I think it distorts the the value of the AL for no benefit at all.

The benefit is there.  If an airline at LHR owns 100 aircraft and 1000 slots, the company should be worth more than if it were based at a tiny regional airport with the same aircraft and 1000 slots.

Quote
I also like to value my airline on an EV/EBITDA basis (ROCE). It shows how much return is generated by all of the capital (Shareholders and Banks) and how efficient I am. This accounting treatment understates that as it assumes I'm getting the same return off a capital base that isn't as big as the accounts assume.

This is why I think you might have a background in venture capital :)  ROCE, RONA, and most other RO* metrics don't tell you anything about effectiveness or efficiency unless you are a VC, angel investor, etc.  The simple illustration would be that you have two airlines, one that leases all of their aircraft and one that owns them all.  The one that owns is going to have a higher asset value, so if they have the same return then the company that owns is going to have poor RO* metrics whereas the one that leases will look amazing.  This is exactly what happened to the Dell-Asus relationship where Dell started reducing their balance sheet and outsourcing to Asus.  Now Dell is in trouble and Asus is completely vertically integrated and is one of the top brands.  ROCE also involves opportunity cost, which is there are multiple options for places to invest your money.  In AWS, you only have one option and that is your airline :)

Quote
And, while I'm at it - I know in the statistics area it publicly shows a Margin, could we also include an EV/EBITDA. The margin just shows how successful (or not) I am at turning my turnover into profit. I would like to compare my ability to turn all the capital I use into profit. Then I can compare myself as a small/medium AL against the Mega Airlines. If I turn my 25m assets into a profit of 2.5m then I'm better at handling my resources than a company with 25bn assets employed that turns a 1bn profit. (Can't do this at the moment because of aforementioned slots issue)

See above.  My biggest beef is that Profit Margin values are not based on EBIT, but post-tax net profit.  This means the statistics (which are used for alliance score) for profit margin are meaningless because two airlines with the same profit margin but different tax rates will end up ranked completely differently.

Quote
(This post is in no way prompted by the fact that when I'm route planning (trying out different times etc) I quite often forget to press the "Don't buy slots" tab and end up with hits to balance sheet and P&L further down the line!  :'( Could we have a sandbox for route planning that only sends it when we're ready to go. (And yes, I know there's the "Confirm" button at the bottom.)

If you buy slots and they expire, they get converted to an tax deductible expense.  This goes back to the slots as an asset thing.

chris.abrams67

  • Former member
Re: Great job with the accounting changes
« Reply #7 on: May 29, 2014, 04:28:28 PM »
Nearly...not VC but PLC!

Quote
Slots are an asset for a few reasons.  In regards to game mechanics, some players pay $20k for a set of slots and others pay $20 million depending on where they are based.  By converting those slot costs to an asset, you can get compare company values much better.  Additionally, since they are an asset they are paid for with post-tax dollars and are not written off as a deductible expense.  Slots are intangible assets and are rights to takeoff/land.  Coca-cola's brand is an intangible asset that cannot be sold/transferred piecemeal, just like slots, but carries a huge value.  Slots are in the same category as it is an asset that allows the company to operate.

Not really, slots are a licence FEE. As they have no intrinsic value they are not realisable, or have any value, from Day 1. The brand value of Coca-Cola could be sold without the underlying manufacturing assets to a brand management company for exploitation (like footballers do with their image rights), however, the slot HAS to be given back, it cannot be transferred, so share holders can't benefit.

As it has one off use (i.e. a licence fee to operate) it should be an expense. The differing value comparison you make would then be made on the absolute earnings generation (i.e. post the expense of the slot purchase).

Quote
The benefit is there.  If an airline at LHR owns 100 aircraft and 1000 slots, the company should be worth more than if it were based at a tiny regional airport with the same aircraft and 1000 slots.

Which it w(sh)ould be demonstrated by the earnings generated. But to compare whether it proportionately is I come back to the EV/EBITDA.

Quote
This is why I think you might have a background in venture capital :)  ROCE, RONA, and most other RO* metrics don't tell you anything about effectiveness or efficiency unless you are a VC, angel investor, etc.  The simple illustration would be that you have two airlines, one that leases all of their aircraft and one that owns them all.  The one that owns is going to have a higher asset value, so if they have the same return then the company that owns is going to have poor RO* metrics whereas the one that leases will look amazing.  This is exactly what happened to the Dell-Asus relationship where Dell started reducing their balance sheet and outsourcing to Asus.  Now Dell is in trouble and Asus is completely vertically integrated and is one of the top brands. 

Which is where my theory falls down a bit, because I think in RL the accounting treatment of leases would be different. I.e. the "finance" element of the lease probably falls through to the Interest line, and therefore excluded from the EV/EBITDA calculation, but the cost of the temporary ownership above the line. And I suspect the accounting for that is a bit beyond the scope of this game. (But I'm not an accountant!)

Quote
See above.  My biggest beef is that Profit Margin values are not based on EBIT, but post-tax net profit.  This means the statistics (which are used for alliance score) for profit margin are meaningless because two airlines with the same profit margin but different tax rates will end up ranked completely differently.

Which is why EV/EBITDA was come up with as a valuation tool rather than RO** and P/E etc. It strips out the different accounting treatments across borders (i.e. Depreciation and Amortisation), differing Tax regimes and Interest rates so you could compare companies across borders. But as you say, leases make it very complicated.

So leases I suspect blow my idea.

But to put in context how fat my fingers are. I have just over $8m of slot value on the books, and a profit write off of something like $2m since I started on slots. And apart from a couple of moves to shift times by 10 minutes or so to accommodate a different aircraft the rest is due to me trying to plan routes but forgetting not to buy the damn thing :'(

Can I also say LemonButt, thank you, I've been using a spreadsheet you posted some time ago which has been really useful (fixed/variable costs).






 

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