American Airlines 2008 Annual Report Download - page 62

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59
1. Summary of Accounting Policies (Continued)
Various taxes and fees assessed on the sale of tickets to end customers are collected by the Company as an
agent and remitted to taxing authorities. These taxes and fees have been presented on a net basis in the
accompanying consolidated statement of operations and recorded as a liability until remitted to the appropriate
taxing authority.
Beginning in the first quarter of 2008, AMR reclassified revenues associated with the marketing component of
AAdvantage program mileage sales from Passenger revenue to Other revenue. As a result of this change,
approximately $584 million, $571 million, $557 million, $451 million, $409 million and $387 million of revenue was
reclassified from Passenger revenue to Other revenue for the years ended December 31, 2007, 2006, 2005, 2004,
2003 and 2002 respectively, to conform to the current presentation.
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 other revenues, as the related services have been provided. 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 $1.7 billion (and is recorded as a component of Air traffic liability on the accompanying
consolidated balance sheets) at December 31, 2008 and $1.6 billion as of December 31, 2007.
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 $153 million, $162 million and $154 million for the years ended
December 31, 2008, 2007 and 2006, respectively.
2. Special Charges and Restructuring Activities
As a result of the revenue environment, high fuel prices and the Company’s restructuring activities, including its
capacity reductions, the Company has recorded a number of charges during the last few years. In May 2008, the
Company announced capacity reductions due to unprecedented high fuel costs at that time and the other
challenges facing the industry. In connection with these capacity reductions, the Company incurred special
charges related to aircraft, employee reductions and certain other charges.