American Airlines 2007 Annual Report Download - page 58

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55
1. Summary of Accounting Policies (Continued)
Frequent Flyer Program The estimated incremental cost of providing free travel awards is accrued for mileage
credits earned by using American’s service that are expected to be redeemed in the future. American also
accrues a frequent flyer liability for the mileage credits that are expected to be used for travel on participating
airlines based on historical usage patterns and contractual rates. American sells mileage credits and related
services to companies participating in its frequent flyer program. The portion of the revenue related to the sale of
mileage credits, representing the revenue for air transportation sold, is valued at fair value and is deferred and
amortized over 28 months, which approximates the expected period over which the mileage credits are used.
Breakage of sold miles is recognized over the estimated period of usage. The remaining portion of the revenue,
representing the marketing services sold and administrative costs associated with operating the AAdvantage
program, is recognized upon sale as a component of passenger revenues, as the related services have been
provided. The Company recognizes this revenue in passenger revenue because it is derived from the value of
the Company’s AAdvantage passengers. The Company’s total liability for future AAdvantage award redemptions
for free, discounted or upgraded travel on American, American Eagle or participating airlines as well as
unrecognized revenue from selling AAdvantage miles was approximately $1.6 billion (and is recorded as a
component of Air traffic liability on the accompanying consolidated balance sheets) at both December 31, 2007
and 2006, respectively. Effective December 15, 2007, AAdvantage members now must have mileage earning or
redemption activity once every eighteen (18) months in order to remain active and retain their miles. Prior to this
change, mileage credits automatically expired after thirty-six (36) months of inactivity in the AAdvantage
member’s account. This change resulted in a benefit of $39 million at implementation in 2007, recognized in
passenger revenue.
Income Taxes The Company generally believes that the positions taken on previously filed income tax returns
are more likely than not to be sustained by the taxing authorities. The Company has recorded income tax and
related interest liabilities where the Company believes its position may not be sustained or where the full income
tax benefit will not be recognized. In accordance with the standards of Financial Accounting Standards Board
Interpretation No. 48 “Accounting for Uncertainty in Income Taxes- an interpretation of FASB Statement No. 109
(FIN 48), the effects of potential income tax benefits resulting from the Company’s unrecognized tax positions are
not reflected in the tax balances of the financial statements. Recognized and unrecognized tax positions are
reviewed and adjusted as events occur that affect the Company’s judgment about the recognizability of income
tax benefits, such as lapsing of applicable statutes of limitations, conclusion of tax audits, release of
administrative guidance, or rendering of a court decision affecting a particular tax position.
Advertising Costs The Company expenses on a straight-line basis the costs of advertising as incurred
throughout the year. Advertising expense was $162 million, $154 million and $144 million for the years ended
December 31, 2007, 2006 and 2005, respectively.
2. Restructuring Charges
In the fourth quarter of 2007, the Company permanently grounded and held for disposal 24 McDonnell Douglas
MD-80 airframes and certain other equipment, all 24 of which had previously been in temporary storage. Of these
24 aircraft, 12 are owned by the Company, seven are accounted for as capital leases and five are accounted for
as operating leases. Primarily as a result of the retirement, the Company incurred a charge of $63 million,
included in Other operating expenses in the consolidated statement of operations, to accrue future lease
commitments and write-down the aircraft frames to their fair values. In determining the fair values of these
aircraft, the Company considered recent transactions involving inventory for the aircraft.