American Airlines 2006 Annual Report Download - page 59

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55
1. Summary of Accounting Policies (Continued)
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.
Equipment and Property The provision for depreciation 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
American jet aircraft and engines 20 - 30 years
Other regional aircraft and engines 16 - 20 years
Major rotable parts, avionics and assemblies Life of equipment to which applicable
Improvements to leased flight equipment Lesser of lease term or expected useful
life
Buildings and improvements (principally on
leased land)
5 - 30 years or term of lease, including
estimated renewal options when
renewal is economically compelled at
key airports
Furniture, fixtures and other equipment 3 - 10 years
Capitalized software 3 - 10 years