Audit and Accounting Guide: Airlines


Get the industry-specific knowledge you need to successfully perform every aspect of your engagement. From revenue recognition challenges associated with frequent flyer programs to guidance for Fresh-Start Accounting, this Guide has you covered.

Airlines - Audit & Accounting Guide provides best practices for accounting and auditing specific to major, regional and cargo airlines, including relevant guidance contained in standards issued through March 1, 2013. Guidance is supplemented with specific “how-to” recommendations for applying the standards to the airline industry.

This Guide covers best practices related to revenue recognition, equipment purchase and maintenance issues, auditing risks, and much more. Covered topics include:

  • Passenger Facility Charges-Save time and avoid errors with the Sample PFC Report-fully updated to comply with the Clarity Standards.
  • Fresh-start Accounting-Step-by-step guidance through the complexities of executing a successful emergence.
  • ASU 2012-02: Impairment Testing for indefinite-lived intangible assets-Guidance on determining when a qualitative assessment is indicated for your client.
  • Audit risk factors-Be prepared to spot red-flags within your audit engagement related to management structure, industry developments, operating characteristics, and more.
  • Revenue recognition-Industry standards and strategies are provided for trouble-spots such as frequent flyer programs, gross vs. net, capacity purchase agreements, manufacturer incentives and multiple element arrangements
  • Clarified Auditing Standards-All auditing content has been fully conformed to reflect changes resulting from the Clarity Project.

Founded in 1887, the American Institute of Certified Public Accountants (AICPA) represents the CPA and accounting profession nationally and globally regarding rule-making and standard-setting, and serves as an advocate before legislative bodies, public interest groups and other professional organizations. The AICPA develops standards for audits of private companies and other services by CPAs; provides educational guidance materials to its members; develops and grades the Uniform CPA Examination; and monitors and enforces compliance with the accounting profession’s technical and ethical standards.

The AICPA’s founding established accountancy as a profession distinguished by rigorous educational requirements, high professional standards, a strict code of professional ethics, a licensing status and a commitment to serving the public interest.

1 The Airline Industry .01-.75

Background .01-.11

History of Regulation .12-.13

U.SGovernment Regulation .14-.25

Department of Transportation .14-.18

Federal Aviation Administration .19-.20

Department of Homeland Security .21

Transportation Security Administration .22

Environmental Protection Agency .23

Occupational Safety and Health Administration .24

Other .25

International Air Transportation .26-.29

The International Air Transport Association .27-.28

Open Skies or Route Authorities .29

Air Transport Association of America .30-.32

Regional Airline Association .33

Characteristics of the Industry .34-.59

Operating Environment .34-.37

Airline Classifications .38-.44

Fuel .45-.47

Taxes and Fees .48

Insurance .49

Maintenance .50-.51

Unionization .52-.53

Marketing Strategy .54-.59

Airline Investments .60-.68

Aircraft Fleet .60-.62

Airport Facilities .63-.65

Fuel Facilities .66

Routes, Slots, and Gates .67-.68

Insurance .69-.75

Aviation Insurance .70-.72

Hull Insurance .73

Terrorism Insurance .74-.75

2 General Auditing Considerations .01-.146

Introduction .01-.03

Scope of This Chapter .04-.05

Planning and Other Auditing Considerations .06-.27

Audit Planning .07-.08

Establishing an Understanding With the Client .09-.10

2 General Auditing Considerations--continued Audit Risk .11-.23

Materiality .24-.27

Assessment of Risks of Material Misstatement at the Assertion Level .28-.30

Understanding the Entity, Its Environment, and Its Internal Control .31-.61

Risk Assessment Procedures .34 -.37

Discussion Among the Audit Team .38

Understanding of the Entity and Its Environment, Including the Entity’s Internal Control .39-.43

Understanding of Internal Control .44 -.61

Risks Assessment and the Design of Further Audit Procedures .62-.89

Identifying and Assessing the Risks of Material Misstatement .63-.69

Designing and Performing Further Audit Procedures .70-.89

Evaluation of Misstatements Identified During the Audit .90-.92

Consideration of Fraud in a Financial Statement Audit .93-.115

Professional Skepticism .95-.97

Discussion Among the Engagement Team .98-.101

Fraud Risk Factors .102-.104

Considering the Results of the Analytical Procedures Performed in Planning the Audit .105

Identifying Risks That May Result in a Material Misstatement Due to Fraud .106-.110

Identification and Assessment of the Risks of Material Misstatement Due to Fraud .111

Responses to the Assessed Risks of Material Misstatement Due to Fraud .112-.115

Analytical Procedures .116-.129

Concluding the Audit .130-.145

Going Concern Considerations .132-.135

Considering Subsequent Events .136-.138

Obtaining Written Representations From Management .139

Written Representations as Audit Evidence .140

Management From Whom Written Representations Are Requested .141-.142

Written Representations About Management’s Responsibilities and Other Written Representations .143-.145

Exhibits .146

3 Marketing, Selling, and Providing Transportation .01-.140

Introduction .01-.05

Process Description .06-.47

Airline Pricing .06-.08

3 Marketing, Selling, and Providing Transportation--continued Sources of Airline Revenue .09

Industry Resolutions .10

Ticketing .11-.14

Sales Reporting .15-.25

Sales Audit .26

Payment Processing .27-.33

Passenger Travel .34-.36

Refunds, Exchanges, and Reissues .37-.41

Statistics .42

Air Traffic Liability .43-.47

Revenue Accounting Issues .48-.139

General .48-.49

Revenue Recognition Methods .50-.55

Interline .56-.61

Air Traffic Liability Verification .62-.66

Unmatched Usage .67

ATL Breakage .68-.80

Passenger Revenue Recognition Model .81-.88

Change and Other Transaction Fees .89-.93

Taxes and Fees .94-.99

Frequent Flyer Programs .100-.137

Capacity Purchase Agreements Gross Versus Net Presentation .138-.139

Inherent Risk Factors .140

4 Acquiring and Maintaining Property and Equipment .01-.140

Background .01-.10

Fleet Strategy .07-.10

Owned Property and Equipment .11-.65

Aircraft Modifications .11-.16

Manufacturer Incentives .17-.28

Liquidated Damages .29-.30

Advanced Delivery Deposits and Capitalized Interest .31-.36

Developmental and Pre-operating Costs .37-.40

Used Aircraft .41-.43

Impairment of Long-Lived Assets .44-.65

Leased Property and Equipment .66-.94

Leasehold Improvements .73-.77

Return Conditions .78-.82

Maintenance Deposits .83-.87

Lease Termination .88-.93

Capacity Purchase Agreements .94

4 Acquiring and Maintaining Property and Equipment--continued Depreciation .95-.107

General .95-.100

Depreciation of Rotable Parts .101

Estimated Useful Life and Salvage Value .102-.103

Amortization of Leasehold Improvements .104-.107

Aircraft Maintenance .108-.139

Expense Recognition .113-.118

Outsourcing Maintenance .119-.130

Spare Parts .131-.139

Inherent Risk Factors .140

5 Employee-Related Costs .01-.51

General .01

Amendable Labor Contracts .02-.20

Background .02-.04

Accounting Guidance .05-.20

Pensions .21-.35

Background .21-.23

Critical Assumptions .24-.31

Termination of Pension Plans .32-.35

Other Postretirement Benefits .36-.38

Other Key Employee Benefits .39-.49

Workers’ Compensation .40-.41

Severance Benefits .42-.47

Pilot Disability (Permanently or Medically Grounded) .48

Voluntary Furloughs .49

Flight Crew Payroll .50

Inherent Risk Factors .51

6 Other Accounting Considerations .01-.112

Intangible Assets .01-.56

Domestic Assets .03-.22

International Route Authorities and Slots .23-.55

Inherent Risk Factors .56

Bankruptcy Matters .57-.80

Statement of Operations .59-.66

Rejected Aircraft .67

Balance Sheet .68-.73

Fresh Start Accounting and Reporting .74-.79

Inherent Risk Factors .80

Guarantees and Indemnities .81-.90

Parent’s Guarantee of Its Subsidiary’s Third-Party Debt or Operating Lease Payments .85

6 Other Accounting Considerations--continued Guarantees Contained in Lease Agreements .86-.88

Guarantees of Indebtedness of Others .89

Inherent Risk Factors .90

Variable Interest Entities .91-.98

Capacity Purchase Agreements .92

Aircraft Leases .93-.95

Enhanced Equipment Trust Certificates .96

Airport Fuel Facilities .97

Inherent Risk Factors .98

Airport Financings .99-.100

Inherent Risk Factors .100

Fuel Hedging .101-.105

Inherent Risk Factors .105

Insurance .106-.112

Captive Insurance .106-.107

Insurer Insolvency .108-.111

Inherent Risk Factors .112

7 Financial Reporting and Disclosures .01-.79

Introduction .01-.04

Accounting Policies and Disclosures .05-.72

Passenger and Other Revenue Recognition .07-.11

Cargo Carriers Revenue Recognition .12-.14

Frequent Flyer Programs .15-.17

Credit Card Holdbacks .18

Aircraft Acquisition Costs .19

Spare Parts .20

Maintenance and Repair Costs .21-.23

Leases .24-.25

Asset Impairment .26-.29

Restructuring and Special Charges .30-.34

Financing Arrangements .35-.44

Capacity Purchase Agreements .45-.48

Air Cargo Capacity Guarantees .49

Segment Disclosures (SEC)* .50-.60

Pensions and Other Postretirement Benefits .61-.63

Risks and Uncertainties .64-.70

Sales Taxes .71-.72

Other SEC Disclosures (SEC)* .73-.79

Risk Factors .73-.74

Critical Accounting Policies, Judgments, and Estimates .75-.76

Off-Balance Sheet Arrangements .77-.78

Tabular Disclosure of Contractual Obligations .79

8 Air Cargo Operations .01-.33

Background .01-.06

General .01

Aircraft Crew Maintenance and Insurance Contracts .02-.04

Customs Services .05

Other Ancillary Services .06

Accounting and Auditing Considerations .07-.33

Revenue Recognition and Measurement .08-.25

Cargo Claims Accruals .26-.28

Passenger-to-Freighter Aircraft Conversions .29-.33

9 Regional Airlines .01-.78

Introduction .01-.04

History of Regional Airlines .01

Effect of Collective Bargaining on Regional Airlines .02-.03

Revenue Sharing and the Evolution of Capacity Purchase Agreements .04

Revenue .05-.26

Prorate Agreements .05-.09

Capacity Purchase Agreements .10-.26

Accounting Issues .27-.77

Regional Carriers’ Revenue Recognition--Capacity Purchase Agreements .28-.61

Presentation of Revenue and Expenses Under Capacity Purchase Agreements--Gross Versus Net .62-.74

Other Contract Provisions .75-.77

Inherent Risk Factors .78

10 Special Reports and Example Reporting .01-.18

Passenger Facility Charges .01-.06

Reporting on PFC Schedules .02-.03

Reporting on Internal Control Over Administering PFCs .04-.05

Illustrative Agreed-Upon Procedures Report Related to a Carrier’s Evaluation of Its Compliance With the Requirements of 14 Code of Federal Regulations Part 158 .06

Immigration and Naturalization Services .07-.08

Illustrative Agreed-Upon Procedures Report on INS Schedules .08

Transportation Security Administration Security Fee .09

DOT Reporting .10-.18

DOT Form 41 .15-.18


A Mapping and Summarization of Changes--Clarified Auditing Standards

B International Financial Reporting Standards

C Schedule of Changes Made to the Text From the Previous Edition


Index of Pronouncements and Other Technical Guidance

Subject Index