Au d i t & Acco u n t i n g g u i d e

Airlines

With conforming changes as of

March 1, 2013

12847-359

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 Copyright © 2013 by
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Preface

About AICPA Audit and Accounting Guides

This AICPA Audit and Accounting Guide has been developed by the AICPA
Airline Guide Task Force to assist management in the preparation of their
financial statements in conformity with U.S. generally accepted accounting
principles (U.S. GAAP) and to assist practitioners in performing and reporting
on their audit engagements.
The Financial Reporting Executive Committee (FinREC) is the designated se-
nior committee of the AICPA authorized to speak for the AICPA in the areas of
financial accounting and reporting. Conforming changes made to the financial
accounting and reporting guidance contained in this guide are approved by the
FinREC Chair (or his or her designee). Updates made to the financial account-
ing and reporting guidance in this guide exceeding that of conforming changes
are approved by the affirmative vote of at least two-thirds of the members of
FinREC.
This guide does the following:
r Identifies certain requirements set forth in Financial Accounting
Standards Board (FASB) Accounting Standards Codification™
(ASC).
r Describes FinREC's understanding of prevalent or sole industry
practice concerning certain issues. In addition, this guide may
indicate that FinREC expresses a preference for the prevalent or
sole industry practice, or it may indicate that FinREC expresses
a preference for another practice that is not the prevalent or sole
industry practice; alternatively, FinREC may express no view on
the matter.
r Identifies certain other, but not necessarily all, industry prac-
tices concerning certain accounting issues without expressing
FinREC's views on them.
r Provides guidance that has been supported by FinREC on the
accounting, reporting, or disclosure treatment of transactions or
events that are not set forth in FASB ASC.
Accounting guidance for nongovernmental entities included in an AICPA Audit
and Accounting Guide is a source of nonauthoritative accounting guidance. As
discussed later in this preface, FASB ASC is the authoritative source of U.S.
accounting and reporting standards for nongovernmental entities, in addition
to guidance issued by the Securities and Exchange Commission (SEC). Ac-
counting guidance for governmental entities included in an AICPA Audit and
Accounting Guide is a source of authoritative accounting guidance described
in category (b) of the hierarchy of GAAP for state and local governmental enti-
ties, and has been cleared by the Governmental Accounting Standards Board
(GASB). AICPA members should be prepared to justify departures from GAAP
as discussed in Rule 203, Accounting Principles (AICPA, Professional Stan-
dards, ET sec. 203 par. .01).

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Auditing guidance included in an AICPA Audit and Accounting Guide is recog-
nized as an interpretive publication pursuant to AU-C section 200, Overall
Objectives of the Independent Auditor and the Conduct of an Audit in Ac-
cordance With Generally Accepted Auditing Standards (AICPA, Professional
Standards). Interpretive publications are recommendations on the application
of generally accepted auditing standards (GAAS) in specific circumstances,
including engagements for entities in specialized industries.

An interpretive publication is issued under the authority of the AICPA Au-

diting Standards Board (ASB) after all ASB members have been provided an
opportunity to consider and comment on whether the proposed interpretive
publication is consistent with GAAS. The members of the ASB have found the
auditing guidance in this guide to be consistent with existing GAAS.

Although interpretive publications are not auditing standards, AU-C section

200 requires the auditor to consider applicable interpretive publications in
planning and performing the audit because interpretive publications are rele-
vant to the proper application of GAAS in specific circumstances. If the auditor
does not apply the auditing guidance in an applicable interpretive publication,
the auditor should document how the requirements of GAAS were complied
with in the circumstances addressed by such auditing guidance.

The ASB is the designated senior committee of the AICPA authorized to speak
for the AICPA on all matters related to auditing. Conforming changes made to
the auditing guidance contained in this guide are approved by the ASB Chair (or
his or her designee) and the Director of the AICPA Audit and Attest Standards
Staff. Updates made to the auditing guidance in this guide exceeding that of
conforming changes are issued after all ASB members have been provided an
opportunity to consider and comment on whether the guide is consistent with
the Statements on Auditing Standards (SAS).

Attestation guidance included in an AICPA Audit and Accounting Guide is

recognized as an attestation interpretation as defined in AT section 50, SSAE
Hierarchy (AICPA, Professional Standards). Attestation interpretations are
recommendations on the application of Statements on Standards for Attesta-
tion Engagements (SSAEs) in specific circumstances, including engagements
for entities in specialized industries. Attestation interpretations are issued
under the authority of the ASB. The members of the ASB have found the
attestation guidance in this guide to be consistent with existing SSAEs.

A practitioner should be aware of and consider interpretive publications appli-

cable to his or her attestation engagement. If the practitioner does not apply
the guidance included in an applicable AICPA Audit and Accounting Guide,
the practitioner should be prepared to explain how he or she complied with the
SSAE provisions addressed by such guidance.

The ASB is the designated senior committee of the AICPA authorized to speak
for the AICPA on all matters related to attestation. Conforming changes made
to the attestation guidance contained in this guide are approved by the ASB
Chair (or his or her designee) and the Director of the AICPA Audit and At-
test Standards Staff. Updates made to the attestation guidance in this guide
exceeding that of conforming changes are issued after all ASB members have
been provided an opportunity to consider and comment on whether the guide
is consistent with the SSAEs.

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Recognition
2013 Guide Edition
AICPA Senior Committees
Auditing Standards Financial Reporting Executive
Board Committee
Ilene Kassman Randolph P. Green
Bruce P. Webb, Chair Richard C. Paul, Chair

AICPA Staff
Liese Faircloth
Technical Manager
Accounting and Auditing Publications

The AICPA gratefully acknowledges those who reviewed and otherwise con-
tributed to the development of this guide: Michael Carreon, Dave W. Dickson,
Craig J. Isakson, and Bert Nappier.

Guidance Considered in This Guide

This edition of the guide has been modified by the AICPA staff to include
certain changes necessary due to the issuance of authoritative guidance since
the guide was originally issued, and other revisions as deemed appropriate.
Authoritative guidance issued through March 1, 2013, has been considered in
the development of this edition of the guide. Authoritative guidance discussed
in the text of the guide.
Authoritative guidance that is issued and effective for entities with fiscal years
ending on or before March 1, 2013, is incorporated directly in the text of this
guide. The presentation of authoritative guidance issued but not yet effective
as of March 1, 2013, for entities with fiscal years ending after that same date is
being presented differently than in past editions of this guide. This information
is being presented as a guidance update, which is a shaded area that contains
information on the new guidance, where appropriate. The distinct presentation
of this content is intended to aid the reader in differentiating content that may
not be effective for the reader's purposes.
This guide includes relevant guidance issued up to and including the following:
r FASB Accounting Standards Update No. 2013-03, Balance Sheet
(Topic 210); Clarifying the Scope of Disclosures about Offsetting
Assets and Liabilities
r SAS No. 127, Omnibus Statement on Auditing Standards—2013
(AICPA, Professional Standards)
r Interpretation No. 1, "Dating the Auditor's Report on Supplemen-
tary Information," of AU section 551, Supplementary Information
in Relation to the Financial Statements as a Whole (AICPA, Pro-
fessional Standards, AU sec. 9551 par. .01–.04)
r Statement of Position 12-1, Reporting Pursuant to the Global
Investment Performance Standards (AICPA, Technical Practice
Aids, AUD sec. 14,450)

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r SSAE No. 17, Reporting on Compiled Prospective Financial State-
ments When the Practitioner's Independence Is Impaired (AICPA,
Professional Standards, AT sec. 301 par. .23)
r Interpretation No. 1, "Reporting Under Section 112 of the Federal
Deposit Insurance Corporation Improvement Act," of AT section
501, An Examination of an Entity's Internal Control Over Finan-
cial Reporting That Is Integrated With and Audit of Its Financial
Statements (AICPA, Professional Standards, AT sec. 9501 par.
.01–.07)
r Public Company Accounting Oversight Board (PCAOB) Auditing
Standard No. 16, Communications with Audit Committees, and
Amendments to Other PCAOB Standards (AICPA, PCAOB Stan-
dards and Related Rules, Auditing Standards)
Users of this guide should consider guidance issued subsequent to those listed
previously to determine their effect on entities covered by this guide. In deter-
mining the applicability of recently issued guidance, its effective date should
also be considered.
The changes made to this edition of the guide are identified in the schedule
of changes appendix. The changes do not include all those that might be con-
sidered necessary if the guide were subjected to a comprehensive review and
revision.

Defining Professional Responsibilities in AICPA

Professional Standards
AICPA professional standards applicable to audit engagements use the follow-
ing two categories of professional requirements, identified by specific terms, to
describe the degree of responsibility they impose on auditors:
r Unconditional requirements. The auditor must comply with an
unconditional requirement in all cases in which such requirement
is relevant. GAAS use the word must to indicate an unconditional
requirement.
r Presumptively mandatory requirements. The auditor must com-
ply with a presumptively mandatory requirement in all cases
in which such a requirement is relevant except in rare circum-
stances. GAAS use the word should to indicate a presumptively
mandatory requirement.
In rare circumstances, the auditor may judge it necessary to depart from a
relevant presumptively mandatory requirement. In such circumstances, the
auditor should perform alternative audit procedures to achieve the intent of
that requirement. The need for the auditor to depart from a relevant presump-
tively mandatory requirement is expected to arise only when the requirement
is for a specific procedure to be performed and, in the specific circumstances
of the audit, that procedure would be ineffective in achieving the intent of the
requirement.
Prior to SAS No. 122, Statements on Auditing Standards: Clarification and
Recodification (AICPA, Professional Standards), the phrase is required to or
requires was used to express an unconditional requirement in GAAS (equiva-
lent to must). With the issuance of SAS No. 122, the phrases is required to and

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requires do not convey a requirement or the degree of responsibility it imposes
on auditors. Instead those terms are used to express that a requirement exists.
The terms are typically used in the clarified auditing standards to indicate that
a requirement exists elsewhere in GAAS.
AICPA professional standards applicable to attest engagements use the follow-
ing two categories of professional requirements, identified by specific terms, to
describe the degree of responsibility they impose on an auditor:
r Unconditional requirements. The auditor is required to comply
with an unconditional requirement in all cases in which the cir-
cumstances exist to which the requirement applies. The terms
must and is required is used to indicate an unconditional require-
ment.
r Presumptively mandatory requirements. The auditor must com-
ply with a presumptively mandatory requirement in all cases in
which the circumstances exist to which the requirement applies;
however, in rare circumstances the auditor may depart from the
requirement provided that the auditor documents his or her jus-
tification for the departure and how the alternative procedures
performed in the circumstances were sufficient to achieve the ob-
jectives of the requirement. The word should is used to indicate a
presumptively mandatory requirement.

It is important to note that upon the effective date of the clarified auditing stan-
dards the terms describing professional requirements for audit engagements
are revised, and are therefore different than those used for attest engagements.
See the preceding section for information on defining professional requirements
related to auditing standards.

Applicability of U.S. GAAP and PCAOB Standards

Audits of the financial statements of nonissuers (those entities not subject to
the Sarbanes-Oxley Act of 2002 or the rules of the SEC—that is, private enti-
ties, generally speaking) are conducted in accordance with GAAS as issued by
the ASB, the designated senior committee of the AICPA with the authority to
promulgate auditing standards for nonissuers. The ASB develops and issues
standards in the form of SASs through a due process that includes deliberation
in meetings open to the public, public exposure of proposed SASs, and a formal
vote. The SASs and their related interpretations are codified in the AICPA's
Professional Standards. Rule 202, Compliance With Standards (AICPA, Pro-
fessional Standards, ET sec. 202 par. .01), of the AICPA Code of Professional
Conduct requires an AICPA member who performs an audit to comply with
the standards promulgated by the ASB. Failure to follow GAAS, and any other
applicable auditing standards, is a violation of that rule.
Audits of the financial statements of issuers, as defined by the SEC (those
entities subject to the Sarbanes-Oxley Act of 2002 or the rules of the SEC—
that is, public entities, generally speaking), are conducted in accordance with
standards established by the PCAOB, a private sector, nonprofit corporation
created by the Sarbanes-Oxley Act of 2002 to oversee the audits of issuers. The
SEC has oversight authority over the PCAOB, including the approval of its
rules, standards, and budget.

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References to Professional Standards
In citing GAAS and its related interpretations, references use section numbers
within the codification of currently effective SASs, not the original statement
number, as appropriate. In those sections of the guides that refer to specific
auditing standards of the PCAOB, references are made to the AICPA's PCAOB
Standards and Related Rules publication.

AICPA.org Website
The AICPA encourages you to visit the website at www.aicpa.org, and the
Financial Reporting Center at www.aicpa.org/FRC. The Financial Reporting
Center supports members in the execution of high-quality financial report-
ing. Whether you are a financial statement preparer or a member in public
practice, this center provides exclusive member-only resources for the entire
financial reporting process, and provides timely and relevant news, guidance
and examples supporting the financial reporting process, including accounting,
preparing financial statements and performing compilation, review, audit, at-
test or assurance and advisory engagements. Certain content on the AICPA's
websites referenced in this guide may be restricted to AICPA members only.

Select Recent Developments Significant to This Guide

ASB’s Clarity Project

To address concerns over the clarity, length, and complexity of its standards,
the ASB has made a significant effort to clarify the SASs. The ASB estab-
lished clarity drafting conventions and undertook to redraft all of its SASs in
accordance with those conventions, which include the following:
r Establishing objectives for each clarified SAS
r Including a definitions section, where relevant, in each clarified
SAS
r Separating requirements from application and other explanatory
material
r Numbering application and other explanatory material para-
graphs using an A- prefix and presenting them in a separate
section that follows the requirements section
r Using formatting techniques, such as bulleted lists, to enhance
readability
r Including, when appropriate, special considerations relevant to
audits of smaller, less complex entities within the text of the clar-
ified SAS
r Including, when appropriate, special considerations relevant to
audits of governmental entities within the text of the clarified
SAS
In addition, as the ASB redrafted standards for clarity, it also converged the
standards with the International Standards on Auditing (ISA), issued by the
International Auditing and Assurance Standards Board. As part of redrafting
the standards, they now specify more clearly the objectives of the auditor and

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the requirements which the auditor has to comply with when conducting an
audit in accordance with GAAS.
With the release of SAS Nos. 117–120 and SAS Nos. 122–127, the project is near
completion. As of the date of this guide, the only SAS remaining to be clarified
is SAS No. 65, The Auditor's Consideration of the Internal Audit Function in
an Audit of Financial Statements (AICPA, Professional Standards, AU-C sec.
610).
Note that SAS No. 122 withdraws SAS No. 26, Association With Financial
Statements, as amended, from Professional Standards.
SAS Nos. 122–127 are effective for audits of financial statements for periods
ending on or after December 15, 2012. Refer to individual AU-C sections for
specific effective date language.
As part of the clarity project, current AU section numbers have been renum-
bered based on equivalent ISAs. Guidance is located in "AU-C" section num-
bers instead of "AU" section numbers. "AU-C" is a temporary identifier to avoid
confusion with references to existing "AU" sections, which will remain in Pro-
fessional Standards through 2013. The "AU-C" identifier will revert to "AU" in
2014, by which time substantially all engagement for which the extant stan-
dards were still effective are expected to be completed. Note that AU-C section
numbers for clarified SASs with no equivalent ISAs have been assigned new
numbers. The ASB believes that this recodification structure will aid firms and
practitioners that use both ISAs and GAAS.
All auditing interpretations corresponding to a SAS have been considered in
the development of a clarified SAS and incorporated accordingly and have been
withdrawn by the ASB except for certain interpretations that the ASB has
retained and revised to reflect the issuance of SAS No. 122. The effective date
of the revised interpretations aligns with the effective date of the corresponding
clarified SAS.

International Financial Reporting Standards

The AICPA governing council voted in May 2008 to recognize the International
Accounting Standards Board (IASB) as an accounting body for purposes of
establishing international financial accounting and reporting principles. This
amendment to appendix A of Rule 202 and Rule 203 of the AICPA's Code of
Professional Conduct gives AICPA members the option to use International
Financial Reporting Standards (IFRSs) as an alternative to U.S. GAAP. As
a result, private entities in the U.S. can prepare their financial statements
in accordance with U.S. GAAP as promulgated by FASB; a special purpose
framework (such as an other comprehensive basis of accounting, or IFRSs,
among others. However, domestic issuers are currently required to follow U.S.
GAAP and the rules and regulations of the SEC. In contrast, foreign private
issuers may present their financial statements in accordance with IFRSs as
issued by the IASB without a reconciliation to U.S. GAAP, or in accordance
with non-IFRSs home-country GAAP reconciled to U.S. GAAP as permitted by
Form 20-F.
The growing acceptance of IFRSs as a basis for U.S. financial reporting may
represent a fundamental change for the U.S. accounting profession. Acceptance
of a single set of high-quality accounting standards for worldwide use by public
companies has been gaining momentum around the globe for the past few
years. See appendix B, "International Financial Reporting Standards," of this

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guide for a discerning look at the status of convergence with IFRS in the United
States and the important issues that accounting professionals need to consider
now.

Private Company Financial Reporting Blue Ribbon Panel

In 2012, the Financial Accounting Foundation established a new body to
improve the process of setting accounting standards for private companies.
The Private Company Council will decide on exceptions and modifications
to U.S. GAAP for private companies and will advise FASB on treatment for
private companies for the items on the FASB's agenda. The AICPA released
an exposure draft in November 2012 of the financial reporting framework for
privately owned, for-profit smaller enterprises that are not required to produce
GAAP-based financial statements. For more information visit www.aicpa.org/
InterestAreas/FRC/AccountingFinancialReporting/PCFR/Pages/Financial-
Reporting-Framework.aspx.

Purpose and Applicability

Introduction
This guide has been written with the assumption that readers are proficient
in accounting and auditing in general, but not necessarily familiar with the
airline industry. Accordingly, the guide includes airline industry background
and explanatory material.
A glossary of terms and several appendixes have been included to provide the
reader with additional sources of information regarding the airline industry.
The appendixes are as follows:
r Appendix A, "Mapping and Summarization of Changes—Clarified
Auditing Standards"
r Appendix B
r Appendix C, "Schedule of Changes Made to the Text From the
Previous Edition"

Limitations
This guide does not discuss the application of all GAAP and all GAAS that
are relevant to the preparation and audit of financial statements of airlines.
This guide is directed primarily to those aspects of the preparation and audit
of financial statements that are unique to airlines or those aspects that are
considered particularly significant to them.

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TABLE OF CONTENTS
Chapter Paragraph

1 The Airline Industry .01-.75

Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .01-.11
History of Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12-.13
U.S. Government Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14-.25
Department of Transportation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14-.18
Federal Aviation Administration . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19-.20
Department of Homeland Security . . . . . . . . . . . . . . . . . . . . . . . . . . .21
Transportation Security Administration . . . . . . . . . . . . . . . . . . . . . . .22
Environmental Protection Agency . . . . . . . . . . . . . . . . . . . . . . . . . . . .23
Occupational Safety and Health Administration . . . . . . . . . . . . .24
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .25
International Air Transportation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .26-.29
The International Air Transport Association . . . . . . . . . . . . . . . . . .27-.28
Open Skies or Route Authorities . . . . . . . . . . . . . . . . . . . . . . . . . . . . .29
Air Transport Association of America . . . . . . . . . . . . . . . . . . . . . . . . . .30-.32
Regional Airline Association . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .33
Characteristics of the Industry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .34-.59
Operating Environment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .34-.37
Airline Classifications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .38-.44
Fuel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .45-.47
Taxes and Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .48
Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .49
Maintenance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .50-.51
Unionization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .52-.53
Marketing Strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .54-.59
Airline Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .60-.68
Aircraft Fleet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .60-.62
Airport Facilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .63-.65
Fuel Facilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .66
Routes, Slots, and Gates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .67-.68
Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .69-.75
Aviation Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .70-.72
Hull Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .73
Terrorism Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .74-.75

2 General Auditing Considerations .01-.146

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .01-.03
Scope of This Chapter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .04-.05
Planning and Other Auditing Considerations . . . . . . . . . . . . . . . . . .06-.27
Audit Planning . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .07-.08
Establishing an Understanding With the Client . . . . . . . . . . . . . .09-.10

Contents
xii Table of Contents

Chapter Paragraph

2 General Auditing Considerations—continued

Audit Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11-.23
Materiality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .24-.27
Assessment of Risks of Material Misstatement at the
Assertion Level . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .28-.30
Understanding the Entity, Its Environment, and Its
Internal Control . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .31-.61
Risk Assessment Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .34 -.37
Discussion Among the Audit Team . . . . . . . . . . . . . . . . . . . . . . . . . . .38
Understanding of the Entity and Its Environment,
Including the Entity’s Internal Control . . . . . . . . . . . . . . . . . . . . .39-.43
Understanding of Internal Control . . . . . . . . . . . . . . . . . . . . . . . . . . .44 -.61
Risks Assessment and the Design of Further
Audit Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .62-.89
Identifying and Assessing the Risks of
Material Misstatement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .63-.69
Designing and Performing Further Audit Procedures . . . . . . . . .70-.89
Evaluation of Misstatements Identified During the Audit . . . . . . . .90-.92
Consideration of Fraud in a Financial Statement Audit . . . . . . . . .93-.115
Professional Skepticism . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .95-.97
Discussion Among the Engagement Team . . . . . . . . . . . . . . . . . . . .98-.101
Fraud Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .102-.104
Considering the Results of the Analytical Procedures
Performed in Planning the Audit . . . . . . . . . . . . . . . . . . . . . . . . . .105
Identifying Risks That May Result in a Material
Misstatement Due to Fraud . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .106-.110
Identification and Assessment of the Risks of Material
Misstatement Due to Fraud . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .111
Responses to the Assessed Risks of Material Misstatement
Due to Fraud . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .112-.115
Analytical Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .116-.129
Concluding the Audit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .130-.145
Going Concern Considerations . . . . . . . . . . . . . . . . . . . . . . . . . . . . .132-.135
Considering Subsequent Events . . . . . . . . . . . . . . . . . . . . . . . . . . . . .136-.138
Obtaining Written Representations From Management . . . . . . .139
Written Representations as Audit Evidence . . . . . . . . . . . . . . . . . .140
Management From Whom Written Representations
Are Requested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .141-.142
Written Representations About Management’s
Responsibilities and Other Written Representations . . . . . . .143-.145
Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .146

3 Marketing, Selling, and Providing Transportation .01-.140

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .01-.05
Process Description . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .06-.47
Airline Pricing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .06-.08

Contents
 Table of Contents xiii
Chapter Paragraph

3 Marketing, Selling, and Providing Transportation—continued

Sources of Airline Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .09
Industry Resolutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10
Ticketing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11-.14
Sales Reporting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15-.25
Sales Audit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .26
Payment Processing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .27-.33
Passenger Travel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .34-.36
Refunds, Exchanges, and Reissues . . . . . . . . . . . . . . . . . . . . . . . . . .37-.41
Statistics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .42
Air Traffic Liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .43-.47
Revenue Accounting Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .48-.139
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .48-.49
Revenue Recognition Methods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .50-.55
Interline . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .56-.61
Air Traffic Liability Verification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .62-.66
Unmatched Usage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .67
ATL Breakage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .68-.80
Passenger Revenue Recognition Model . . . . . . . . . . . . . . . . . . . . . .81-.88
Change and Other Transaction Fees . . . . . . . . . . . . . . . . . . . . . . . .89-.93
Taxes and Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .94-.99
Frequent Flyer Programs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .100-.137
Capacity Purchase Agreements Gross Versus Net
Presentation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .138-.139
Inherent Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .140

4 Acquiring and Maintaining Property and Equipment .01-.140

Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .01-.10
Fleet Strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .07-.10
Owned Property and Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11-.65
Aircraft Modifications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11-.16
Manufacturer Incentives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17-.28
Liquidated Damages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .29-.30
Advanced Delivery Deposits and Capitalized Interest . . . . . . . .31-.36
Developmental and Pre-operating Costs . . . . . . . . . . . . . . . . . . . . .37-.40
Used Aircraft . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .41-.43
Impairment of Long-Lived Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . .44-.65
Leased Property and Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .66-.94
Leasehold Improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .73-.77
Return Conditions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .78-.82
Maintenance Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .83-.87
Lease Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .88-.93
Capacity Purchase Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . .94

Contents
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Chapter Paragraph

4 Acquiring and Maintaining Property and Equipment—continued

Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .95-.107
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .95-.100
Depreciation of Rotable Parts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .101
Estimated Useful Life and Salvage Value . . . . . . . . . . . . . . . . . . . . .102-.103
Amortization of Leasehold Improvements . . . . . . . . . . . . . . . . . . . .104-.107
Aircraft Maintenance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .108-.139
Expense Recognition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .113-.118
Outsourcing Maintenance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .119-.130
Spare Parts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .131-.139
Inherent Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .140

5 Employee-Related Costs .01-.51

General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .01
Amendable Labor Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .02-.20
Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .02-.04
Accounting Guidance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .05-.20
Pensions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .21-.35
Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .21-.23
Critical Assumptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .24-.31
Termination of Pension Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .32-.35
Other Postretirement Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .36-.38
Other Key Employee Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .39-.49
Workers’ Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .40-.41
Severance Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .42-.47
Pilot Disability (Permanently or Medically Grounded) . . . . . . . .48
Voluntary Furloughs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .49
Flight Crew Payroll . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .50
Inherent Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .51

6 Other Accounting Considerations .01-.112

Intangible Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .01-.56
Domestic Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .03-.22
International Route Authorities and Slots . . . . . . . . . . . . . . . . . . . . .23-.55
Inherent Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .56
Bankruptcy Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .57-.80
Statement of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .59-.66
Rejected Aircraft . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .67
Balance Sheet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .68-.73
Fresh Start Accounting and Reporting . . . . . . . . . . . . . . . . . . . . . . .74-.79
Inherent Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .80
Guarantees and Indemnities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .81-.90
Parent’s Guarantee of Its Subsidiary’s Third-Party Debt
or Operating Lease Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . .85

Contents
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Chapter Paragraph

6 Other Accounting Considerations—continued

Guarantees Contained in Lease Agreements . . . . . . . . . . . . . . . . .86-.88
Guarantees of Indebtedness of Others . . . . . . . . . . . . . . . . . . . . . . .89
Inherent Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .90
Variable Interest Entities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .91-.98
Capacity Purchase Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . .92
Aircraft Leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .93-.95
Enhanced Equipment Trust Certificates . . . . . . . . . . . . . . . . . . . . . . .96
Airport Fuel Facilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .97
Inherent Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .98
Airport Financings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .99-.100
Inherent Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .100
Fuel Hedging . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .101-.105
Inherent Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .105
Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .106-.112
Captive Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .106-.107
Insurer Insolvency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .108-.111
Inherent Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .112

7 Financial Reporting and Disclosures .01-.79

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .01-.04
Accounting Policies and Disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . .05-.72
Passenger and Other Revenue Recognition . . . . . . . . . . . . . . . . . .07-.11
Cargo Carriers Revenue Recognition . . . . . . . . . . . . . . . . . . . . . . . .12-.14
Frequent Flyer Programs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15-.17
Credit Card Holdbacks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18
Aircraft Acquisition Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19
Spare Parts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20
Maintenance and Repair Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .21-.23
Leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .24-.25
Asset Impairment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .26-.29
Restructuring and Special Charges . . . . . . . . . . . . . . . . . . . . . . . . .30-.34
Financing Arrangements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .35-.44
Capacity Purchase Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . .45-.48
Air Cargo Capacity Guarantees . . . . . . . . . . . . . . . . . . . . . . . . . . . .49
Segment Disclosures (SEC)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .50-.60
Pensions and Other Postretirement Benefits . . . . . . . . . . . . . . . . . .61-.63
Risks and Uncertainties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .64-.70
Sales Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .71-.72
Other SEC Disclosures (SEC)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .73-.79
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .73-.74
Critical Accounting Policies, Judgments, and Estimates . . . . . . .75-.76
Off-Balance Sheet Arrangements . . . . . . . . . . . . . . . . . . . . . . . . . . . .77-.78
Tabular Disclosure of Contractual Obligations . . . . . . . . . . . . . . .79

Contents
xvi Table of Contents

Chapter Paragraph

8 Air Cargo Operations .01-.33

Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .01-.06
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .01
Aircraft Crew Maintenance and Insurance Contracts . . . . . . . .02-.04
Customs Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .05
Other Ancillary Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .06
Accounting and Auditing Considerations . . . . . . . . . . . . . . . . . . . . . .07-.33
Revenue Recognition and Measurement . . . . . . . . . . . . . . . . . . . . .08-.25
Cargo Claims Accruals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .26-.28
Passenger-to-Freighter Aircraft Conversions . . . . . . . . . . . . . . . . . .29-.33

9 Regional Airlines .01-.78

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .01-.04
History of Regional Airlines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .01
Effect of Collective Bargaining on Regional Airlines . . . . . . . . . .02-.03
Revenue Sharing and the Evolution of Capacity
Purchase Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .04
Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .05-.26
Prorate Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .05-.09
Capacity Purchase Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10-.26
Accounting Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .27-.77
Regional Carriers’ Revenue Recognition—Capacity
Purchase Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .28-.61
Presentation of Revenue and Expenses Under Capacity
Purchase Agreements—Gross Versus Net . . . . . . . . . . . . . . . . .62-.74
Other Contract Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .75-.77
Inherent Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .78

10 Special Reports and Example Reporting .01-.18

Passenger Facility Charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .01-.06
Reporting on PFC Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .02-.03
Reporting on Internal Control Over Administering PFCs . . . . . .04-.05
Illustrative Agreed-Upon Procedures Report Related
to a Carrier’s Evaluation of Its Compliance With
the Requirements of 14 Code of Federal Regulations
Part 158 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .06
Immigration and Naturalization Services . . . . . . . . . . . . . . . . . . . . . .07-.08
Illustrative Agreed-Upon Procedures Report on
INS Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .08
Transportation Security Administration Security Fee . . . . . . . . . . . .09
DOT Reporting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10-.18
DOT Form 41 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15-.18

Contents
 Table of Contents xvii

Appendix
A Mapping and Summarization of Changes—Clarified Auditing Standards
B International Financial Reporting Standards
C Schedule of Changes Made to the Text From the Previous Edition
Glossary
Index of Pronouncements and Other Technical Guidance
Subject Index

Contents