American Airlines 2000 Annual Report Download - page 21

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NOTES T O CONSOLI DATED FINANCI AL STAT EMENT S
1. SU MM ARY OF ACCOU N TI NG POLICI ES
Basis of Presentation The consolidated financial state-
ments include the accounts of AMR Corporation (AMR
or the Company) and its wholly owned subsidiaries,
including its principal subsidiary American Airlines, Inc.
(American). All significant intercompany transactions
have been eliminated. The results of operations, cash
flows and net assets for Sabre Holdings Corporation
(Sabre), AMR Services, AMR Combs and TeleService
Resources have been reflected in the consolidated
financial statements as discontinued operations. Unless
specifically indicated otherwise, the information in the
footnotes relates to the continuing operations of AMR.
All share and per share amounts reflect the stock split
on June 9, 1998, where appropriate. Certain amounts
from prior years have been reclassified to conform with
the 2000 presentation.
Use of Estimates The preparation of financial state-
ments in conformity with generally accepted accounting
principles requires management to make estimates and
assumptions that affect the amounts reported in the
consolidated financial statements and accompanying
notes. Actual results could differ from those estimates.
Inventories Spare parts, materials and supplies relating
to flight equipment are carried at average acquisition
cost and are expensed when incurred in operations.
Allowances for obsolescence are provided, over the
estimated useful life of the related aircraft and engines,
for spare parts expected to be on hand at the date air-
craft are retired from service, plus allowances for spare
parts currently identified as excess. These allowances
are based on management estimates, which are subject
to change.
Equipment and Property The provision for deprecia-
tion of operating equipment and property is computed
on the straight-line method applied to each unit of
property, except that major rotable parts, avionics and
assemblies are depreciated on a group basis.
The depreciable lives used for the principal depreciable
asset classifications are:
Depreciable Life
Boeing 727-200 aircraft 20031
Other American jet aircraft 20–30 years
Regional aircraft and engines 16–20 years
Major rotable parts, Life of equipment to
avionics and assemblies which applicable
Improvements to leased flight equipment Term of lease
Buildings and improvements 10–30 years or term
(principally on leased land) of lease
Furniture, fixtures and other equipment 3–20 years
Capitalized software 3–10 years
1Approximate final aircraft retirement date.
Residual values for aircraft, engines, major rotable
parts, avionics and assemblies are generally five to
10 percent, except when a guaranteed residual value
or other agreements exist to better estimate the resid-
ual value.
Effective January 1, 1999, in order to more
accurately reflect the expected useful life of its aircraft,
the Company changed its estimate of the depreciable
lives of certain aircraft types from 20 to 25 years and
increased the residual value from five to 10 percent. It
also established a 30-year life for its new Boeing 777
aircraft, first delivered in the first quarter of 1999. As
a result of this change, depreciation and amortization
expense was reduced by approximately $158 million
and net earnings were increased by approximately
$99 million, or $0.63 per common share diluted, for
the year ended December 31, 1999.
Equipment and property under capital leases are
amortized over the term of the leases or, in the case of
certain aircraft, over their expected useful lives, and
such amortization is included in depreciation and amor-
tization. Lease terms vary but are generally 10 to 25
years for aircraft and seven to 40 years for other leased
equipment and property.
Maintenance and Repair Costs Maintenance and repair
costs for owned and leased flight equipment are
charged to operating expense as incurred, except
engine overhaul costs incurred by AMR Eagle Holding
Corporation (AMR Eagle) and costs incurred for mainte-
nance and repair under power by the hour mainte-
nance contract agreements, which are accrued on the
basis of hours flown.