American Airlines 2003 Annual Report Download - page 50

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48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Accounting Policies
Basis of Presentation The accompanying consolidated financial statements include the accounts of AMR
Corporation (AMR or the Company) and its wholly owned subsidiaries, including its principal subsidiary American
Airlines, Inc. (American). On April 9, 2001, American (through a wholly owned subsidiary, TWA Airlines LLC
(TWA LLC)) purchased substantially all of the assets of Trans World Airlines, Inc. (TWA) and assumed certain
liabilities. TWA was the eighth largest U.S. carrier, with a primary domestic hub in St. Louis. American funded the
acquisition of TWA’s assets with its existing cash and short-term investments. The acquisition of TWA was
accounted for under the purchase method of accounting and, accordingly, the operating results of TWA LLC since
the date of acquisition have been included in the accompanying consolidated financial statements. All significant
intercompany transactions have been eliminated. Certain amounts have been reclassified to conform with the
2003 presentation.
Use of Estimates The preparation of financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect the amounts reported in the
accompanying consolidated financial statements and accompanying notes. Actual results could differ from those
estimates.
Restricted Cash and Short-term Investments The Company has restricted cash and short-term investments
related primarily to collateral held to support projected workers’ compensation obligations and various other
obligations.
Inventories Spare parts, materials and supplies relating to flight equipment are carried at average acquisition
cost and are expensed when used 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 aircraft are
retired from service. Allowances are also provided for spare parts currently identified as excess. These
allowances are based on management estimates, which are subject to change.
Maintenance and Repair Costs Maintenance and repair costs for owned and leased flight equipment are
charged to operating expense as incurred, except costs incurred for maintenance and repair under flight hour
maintenance contract agreements, which are accrued based on contractual terms.
Intangible Assets Route acquisition costs and airport operating and gate lease rights represent the purchase
price attributable to route authorities (including international airport take-off and landing slots), domestic airport
take-off and landing slots and airport gate leasehold rights acquired. Indefinite-lived intangible assets (route
acquisition costs) are tested for impairment annually on December 31, rather than amortized, in accordance with
Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (SFAS 142).
Airport operating and gate lease rights are being amortized on a straight-line basis over 25 years to a zero residual
value.
Statements of Cash Flows Short-term investments, without regard to remaining maturity at acquisition, are not
considered as cash equivalents for purposes of the statements of cash flows.
Employee Accruals The Company estimates the amount of potential retroactive pay expected to be provided
upon finalization of a labor agreement for work groups working under contracts that have become amendable.
These estimates are based upon management’s expectation of the most likely outcome of the contract
negotiations.