American Airlines 2005 Annual Report Download - page 55

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52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Accounting Policies
Basis of Presentation The accompanying consolidated financial statements as of December 31, 2005 and for
the three years ended December 31, 2005 include the accounts of AMR Corporation (AMR or the Company) and
its wholly owned subsidiaries, including (i) its principal subsidiary American Airlines, Inc. (American) and (ii) its
regional airline subsidiary, AMR Eagle Holding Corporation and its primary subsidiaries, American Eagle Airlines,
Inc., Executive Airlines, Inc. and AMR Leasing Corporation (collectively, AMR Eagle). The consolidated financial
statements as of and for the year ended December 31, 2005 include the accounts of the Company and its wholly
owned subsidiaries as well as variable interest entities for which the Company is the primary beneficiary. All
significant intercompany transactions have been eliminated.
Reclassifications Certain charges of $11 million and $407 million in 2004 and 2003, respectively, resulting from
the Terrorist Attacks and our related restructuring activities were previously recorded in Special charges in the
consolidated statement of operations. These amounts have been included in Other operating expenses.
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.
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 and obsolete.
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 when an obligation exists.
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.
Measurement of Asset Impairments In accordance with Statement of Financial Accounting Standards No.
144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (SFAS 144), the Company records
impairment charges on long-lived assets used in operations when events and circumstances indicate that the
assets may be impaired, the undiscounted cash flows estimated to be generated by those assets are less than
the carrying amount of those assets and the net book value of the assets exceeds their estimated fair value. In
making these determinations, the Company uses certain assumptions, including, but not limited to: (i) estimated
fair value of the assets; and (ii) estimated future cash flows expected to be generated by these assets, which are
based on additional assumptions such as asset utilization, length of service the asset will be used in the
Company’s operations and estimated salvage values.