Accounting change - questions and answers thread

[BD]

LA, IMO there might a conceptual misunderstanding behind your point on AC value.

If you "underpay" an AC by 10 millions, you will also have 10 millions more cash than if you had paid the recommended price. And cash IS company value too.
That means that your company value right after the purchase will be the same regardless the price you have paid for the aircraft.

On the contrary, "paying cheap" is good for the long term perspectives of your company value. These extra 10 millions cash may eventually allow you to increase your investment in ACs and slots, and possibly earn more cash in the future than if you had overpaid the aircraft.

I think I see the point LA is trying to make....

Assuming the borrowing limits are not affected by the value of the aircraft (IDK how they are determined, but it ought to be tied largely to the profitability of the airline - i.e. ability to support the payment, with some buffer built in based on credit rating), then, ceteris peribus, it is more efficient to pledge an aircraft to its market value, allowing more headroom for future borrowing.

The extent that an airline cannot do this, it puts another constraint on its borrowing.  This is probably more important to younger/smaller airlines, as there comes a point with larger airlines where one has more aircraft than can be borrowed against.

[LotusAirways]

If you "underpay" an AC by 10 millions, you will also have 10 millions more cash than if you had paid the recommended price. That means that your company value right after the purchase will be the same regardless the price you have paid for the aircraft.

Hi abez,
A valid point which I am aware of. I think you may have missed my point, an example to illustrate.

Under the new accounting system, which I am in favour of, two things --(a) and (b) on my previous post-- are different:

OLD
buy an aircraft with market value of 10m for 7m,
company value increases by 3m,
borrowing power with collateral increases by 3m.

NEW
buy an aircraft with market value of 10m for 7m,
company value doesn't change,
borrowing power with collateral doesn't change.

So under the old system the incentive to hunt for bargains is much higher. That is my point, nothing more and nothing less. And my point leads to one question: can we do better. Sami replied, nope can't do. Issue closed.

LA

PS: Sami says "Companies may re-valuate their assets if needed, but commonly that is used only for intangible assets like goodwill."
- I agree, for depreciation purposes (which corresponds to company value);
- But not when the asset is pledged as collateral for a loan. Lenders do not care about the purchased price (which sometimes is zero in case of gifts and donations), only the current market value.    

[Sami]

Yes, but then there would be incentive for players to clog up production lines and resell aircraft (sound familiar?).  If an aircraft is $100 million and I get a 20% discount to $80 million, I have an $80 million aircraft (worth $100 million on the open market) and $20 million in cash.  If I can sell the aircraft for $100 million then I earn $20 million.  Therefore, there is a huge incentive for me to jam up the production lines and resell popular models.

Firstly, nothing assures that you can sell the plane for $100mil. You may sell it for $70, or $120mil ... If you sell if for the $100mil, you will pay taxes of the difference (let's say 30% of the $20mil profit, meaning -$6mil into taxes of the transaction; so your profit for selling the plane bought for $70mil, which manufacturer listed as $100, is $14mil) - unless you have tax-deductible expenses that cover it. But in the new accounting model you will end up paying taxes more often than before since a/c purchases are not tax deductable.

And look it by any way, ultimately the proper accounting system discourages people to glog the prod.lines just to get some easy gains, unlike in present system where you could 'reset' your taxes by just making a big order for the future.

OLD
buy an aircraft with market value of 10m for 7m,
company value increases by 3m,
borrowing power with collateral increases by 3m.

NEW
buy an aircraft with market value of 10m for 7m,
company value doesn't change,
borrowing power with collateral doesn't change.

Collateral for borrowing (ie. value of aircraft as loan security) has been already changed some time ago away from the old aircraft value metric (what you referred here as "market value" in old system). How bank values your aircraft when taking out a loan has got nothing to do with the book value of the aircraft that you have, so it's not necessarily valued at $7mil by the bank, may be more or may be less. But if it was a bargain to buy, then bank values it as more than your paid price....  (in the test game I bought an old A300 for $73mil for example, but bank values it only for $63 when I try to take a loan against it)

(And also you confuse again things by including this "market value" also in the "new" model. "Market value" of the plane is the value an airline is willing to pay for the plane. And if you bought it for $7, then it's market value in this case was $7mil.)


So to sum it up. Forget everything you used to remember about the old "aircraft value".

[LotusAirways]

"How bank values your aircraft when taking out a loan has got nothing to do with the book value of the aircraft that you have, so it's not necessarily valued at $7mil by the bank, may be more or may be less. But if it was a bargain to buy, then bank values it as more than your paid price."

Thanks. You may need to look at the accounting demo do, as I bought a below market value/market price/recommended price airplane and when applying for a loan the bank valued the airplane at... purchased price.

""Market value" of the plane is the value an airline is willing to pay for the plane. And if you bought it for $7, then it's market value in this case was $7mil."

I use market value as in real world market value/market price.  

[Sami]

FYI to players in the accounting test game  .... tax man was sleeping, and didn't work properly. It has been fixed, and it will take any pending taxes (= if any profits) in one big lump and then will start to function normally on the next week.

(I have also manually forwarded the time a few days due to this)

[Zombie Slayer]

Yes, but then there would be incentive for players to clog up production lines and resell aircraft (sound familiar?).  If an aircraft is $100 million and I get a 20% discount to $80 million, I have an $80 million aircraft (worth $100 million on the open market) and $20 million in cash.  If I can sell the aircraft for $100 million then I earn $20 million.  Therefore, there is a huge incentive for me to jam up the production lines and resell popular models.

IMO the easy solution would be to eliminate the discounts for direct purchase (but keep for leasing) since immediate resale is unrestricted.  This would remove part of the incentive to jam up the production lines.

Firstly, nothing assures that you can sell the plane for $100mil. You may sell it for $70, or $120mil ... If you sell if for the $100mil, you will pay taxes of the difference (let's say 30% of the $20mil profit, meaning -$6mil into taxes of the transaction; so your profit for selling the plane bought for $70mil, which manufacturer listed as $100, is $14mil) - unless you have tax-deductible expenses that cover it. But in the new accounting model you will end up paying taxes more often than before since a/c purchases are not tax deductable.

And look it by any way, ultimately the proper accounting system discourages people to glog the prod.lines just to get some easy gains, unlike in present system where you could 'reset' your taxes by just making a big order for the future.


Collateral for borrowing (ie. value of aircraft as loan security) has been already changed some time ago away from the old aircraft value metric (what you referred here as "market value" in old system). How bank values your aircraft when taking out a loan has got nothing to do with the book value of the aircraft that you have, so it's not necessarily valued at $7mil by the bank, may be more or may be less. But if it was a bargain to buy, then bank values it as more than your paid price....  (in the test game I bought an old A300 for $73mil for example, but bank values it only for $63 when I try to take a loan against it)

(And also you confuse again things by including this "market value" also in the "new" model. "Market value" of the plane is the value an airline is willing to pay for the plane. And if you bought it for $7, then it's market value in this case was $7mil.)


So to sum it up. Forget everything you used to remember about the old "aircraft value".

I will join the new accounting system demo game here in a few minutes, but I just want to get my 2 cents worth in on this. It certainly appears that there is far less reward for ordering planes with large discounts for whatever reason (discount to resell, tax evasion, etc) which brings to mind two issues.

First, I agree with LotusAirways on the fact that there should be some way to account for the gain, realized or unrealized, from prepaying and/or placing large orders and getting a significant discount on new planes. Lets say, for example, I buy 40 $100m planes at a discount of 36% (launch discount, 100% prepay discount, full large order discount) and pay $64m a piece for them. After 25 years, I have lost $3.6m a plane in salvage value if I understand the new system correctly (from $10m a plane to $6.4m a plane), plus the "new" value of that plane may be $110m by the time it is delivered. What I am trying to get at here is, make the depreciation bottom/salvage value based on a full priced plane, even if depreciation starts significantly lower so there is more incentive to prepay planes.

Second, if there is a way to exploit the new accounting system, it will be exploited. If I place the same order as above and have $36m in instant equity in every one of those planes, you better believe I am going to clog any popular line I am not using for my own profit. For at least 10 years from the start of a game, there will be profit to be made on A32x, 737NG, A330, and 767 at least (sorry, just being honest and objective here.) I am paying taxes anyway, no way around it now, so why not find new ways to earn a profit? This plays into my first statement where, even if not 100% realistic, making the value at delivery of any plane purchased the current new build list price would go a long way to stopping the above described exploit.

[dmoose42]

Jetwest #1: I believe that the salvage value from depreciation is different than the scrapping value.  The scrapping value is independent of the book value and therefore you should not be losing that $3.6m.

Jetwest #2: This is actually pretty tricky because if sami were to do as you propose, take an example where you buy for $70m and it's worth $100 in five years when the plane is delivered, and you sell it for $90.  You shouldn't have a $10 loss on something you paid $70 for.

The $30m in growth (from 70 to 100) could be considered a taxable gain but that would inflate people's tax bills.  If you want it to be an non-taxable gain (to defer the tax until the sale), then you would have a book value of $100, a tax basis of $70, but you would have to track both numbers - which will likely be confusing to a lot of users and seems unnecessarily complicated.

[Sami]

Back to the test game itself ... everything working logically?  At least no bigger issues so far, thus estimated launch would be this thursday/friday probably.

Only thing what I have to do is test the conversion from old->new for a/c orders and such.


Already a few notes of the conversion, details later:

- All existing slots will be set to zero value, new slots will have the value allocated normally according to the new system. This is since you've already deducted them as expenses. This may drop your company's total value a bit, but not much as the slot value calculation hasn't been online very long (has been just to make sure it was working).

- All existing owned aircraft were already written off as expenses fully but due technical reasons they have to be depreciated according to the new system too. However most likely in their case the depreciation won't be written as an expese to the income statement (their value will just reduce according to the 25y-schedule), if it's technically feasible. (it's the correct way to do it, but you will then have owned planes that do and do not create the depreciation expense, depending on when they were bought - any planes bought after new system will depreciate normally. So this may be confusing but it's part of the transition and does not affect any new airlines or new games).

[abezerra]

I think you may have missed my point, an example to illustrate.

Now I got it 

Well, Sami's reply says everything.

[abezerra]

Back to the test game itself ... everything working logically?

I am desperately trying to test the sale of an aircraft and its impact on BS, CF and Income Statement.

Any Test Game participant could volunteer to purchase an A319-100 that I listed for sale in the UM?
Seller is "IFRS Test". Price is near to lowest allowed.

Thanks

[abezerra]

I am desperately trying to test the sale of an aircraft and its impact on BS, CF and Income Statement.

Done. Seems to work perfectly in all financial statements, and tax loss carryforwards.

Only remark: the total value of the aircraft of the sale appears in the cashflow category "Capital Gains". Capital gain refer to a profit from the sale of an asset, i.e. the concept of "profit from sold aircraft" that appears in the income statement. You may want to rename that part of the cashflow statement to avoid confusion.

[Sami]

Did you sell it already?

While you're at it, you can buy my shiny new A300-600R .. :p   

[dmoose42]

bought it!

[Cardinal]

Just joined the test game. First UI thing I noticed is that clicking "Income Statement" through the dropdown menus shows the "new" income statement. Clicking on "Money" at the top of the screen shows the "old" income statement.

Also, my purchased aircraft did not show up next to "purchased aircraft" on the new income statement. It shows up correctly on the old one.



Thoughts on the financial changes:
Honestly, I just want a bottom-line "am I making money?" number. All the rest I really have no interest in at all. Zero. I don't pay much attention to all the lines between "sold tickets" and "Result" on the old income statement, other than fuel and payroll. There's a reason I went to school for I.T. and not Business School. It's all just too much information for me. I get that it's necessary, but that's why my virtual airline employs virtual bean counters to figure it all out. As long as there is somewhere I can click that gives me the bottom line number, everything else might as well be in Cyrillic for all the sense I can make out of it.

[abezerra]

Anyone willing to lease a shiny A319-100?  

Listed in the UM at a value of 40.000.000$ for lease only, seller IFRS Test.

I'd like to see how the pre-paid revenue is going to display in my cashflow statement.

P.S. Cash flow statement layout clearer now

[abezerra]

Honestly, I just want a bottom-line "am I making money?" number. All the rest I really have no interest in at all. Zero.

In your cashflow statement, the line "Net change in cash flows" is basically your old bottom-line.
You can keep ignoring all the rest 

[Sami]

Just joined the test game. First UI thing I noticed is that clicking "Income Statement" through the dropdown menus shows the "new" income statement. Clicking on "Money" at the top of the screen shows the "old" income statement.

Incomes/New/ is a temporary address

Also, my purchased aircraft did not show up next to "purchased aircraft" on the new income statement. It shows up correctly on the old one.

This is absolutely correct, pls read the manual.

Honestly, I just want a bottom-line "am I making money?" number.

Cash flow statement tells if you are losing or gaining money

[Cardinal]

This is absolutely correct, pls read the manual.

I read the manual and there was not an explanation of the "Purchased Aircraft" line item of the new Income Statement.

If there is a line item for "Purchased Aircraft" and it remains zero after buying two planes on the used market, even after delivery, what is that line item for?

[Sami]

It's needed for the transition period, old orders are counted as expenses still.

[rubiohiguey]

This will become less of a game and more of ACC201 practice ....