American Airlines 2007 Annual Report Download - page 67

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64
7. Financial Instruments and Risk Management (Continued)
Fair Values of Financial Instruments The fair values of the Company's long-term debt were estimated using
quoted market prices where available. For long-term debt not actively traded, fair values were estimated using
discounted cash flow analyses, based on the Company's current incremental borrowing rates for similar types of
borrowing arrangements. The carrying amounts and estimated fair values of the Company's long-term debt,
including current maturities, were (in millions):
December 31,
2007 2006
Carrying
Value
Fair
Value
Carrying
Value
Fair
Value
Secured variable and fixed rate
indebtedness
$ 4,662
$ 3,896
$ 6,000
$ 5,574
Enhanced equipment trust
certificates
2,482
2,472
2,968
3,068
6.0% - 8.5% special facility revenue
bonds
1,688
1,801
1,697
1,978
Credit facility agreement 440 423 740 743
4.25% - 4.50 % senior convertible
notes
619
670
619
1,037
9.0% - 10.20% debentures 213 178 213 222
7.88% - 10.55% notes 211 195 226 220
$ 10,315 $ 9,635 $ 12,463 $ 12,842
8. Income Taxes
On January 1, 2007, the Company adopted Financial Accounting Standards Board Interpretation No. 48
“Accounting for Uncertainty in Income Taxes” (FIN 48). FIN 48 prescribes a recognition threshold that a tax
position is required to meet before being recognized in the financial statements and provides guidance on
derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and
transition issues.
The Company has an unrecognized tax benefit of approximately $40 million which did not change significantly
during the twelve months ended December 31, 2007. The application of FIN 48 would have resulted in an
increase in retained earnings of $40 million, except that the increase was fully offset by the application of a
valuation allowance. In addition, future changes in the unrecognized tax benefit will have no impact on the
effective tax rate due to the existence of the valuation allowance. Accrued interest on tax positions is recorded as
a component of interest expense but is not significant at December 31, 2007.
The reconciliation of the beginning and ending amounts of unrecognized tax benefit are (in millions):
Unrecognized Tax Benefit at January 1, 2007 $ 41
Decreases due to settlements with taxing authority (1)
Unrecognized Tax Benefit at December 31, 2007 $ 40
Due to the valuation allowance, the total amount of unrecognized tax benefit if recognized that would affect the
effective tax rate would be zero. The Company estimates that the unrecognized tax benefit will not significantly
change within the next twelve months.
The Company files its tax returns as prescribed by the tax laws of the jurisdictions in which it operates. The
Company is currently under audit by the Internal Revenue Service for its 2001 through 2003 tax years. The
anticipated closing date is in 2008. The Company’s 2004 through 2006 tax years are still subject to examination.
Various state and foreign jurisdiction tax years remain open to examination as well, though the Company believes
that the effect of any additional assessment(s) will be immaterial to its consolidated financial statements.