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Method |
Guidance |
Direct expense (ASC 908-720-25-3) |
Overhauls associated with large fleets are relatively constant from period to period, thus most carriers recognize the cost of overhauls as expense as they are incurred. |
The actual cost of each overhaul is capitalized and amortized to the next overhaul. |
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When overhaul costs are included or combined with other costs, a reporting entity would segregate costs into components that (1) are depreciated over the useful life of the asset and (2) require overhaul at periodic intervals. The cost of the initial overhaul is capitalized and amortized to the next overhaul, at which time the process is repeated. |
AICPA Audit and Accounting Guide for Airlines
Excerpt from AICPA Audit and Accounting Guide for Airlines
Paragraph 4.123
FinREC believes the issues relating to PBTH contracts and other similar arrangements with independent maintenance and repair providers include determining whether risk has been transferred to the service provider. The risk transfer criteria discussed in this section provide a framework for determining whether there is a transfer of risk. If the contract transfers risk, FinREC believes the airline should recognize maintenance expense in accordance with the PBTH contract, as opposed to following its maintenance accounting policy. In these situations, FinREC believes there is a presumption that the expense should be recognized at a level rate per hour during the minimum, noncancelable term of the PBTH agreement. That presumption could be overcome by evidence that the level of service effort varies over time, consistent with the variations in the payment pattern under the PBTH contract.
Criterion |
Guidance |
True-ups
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The service provider absorbing substantially all of the variability of the cost of maintenance may transfer risk to the service provider.
A contract that provides for true-up payments to cover actual costs incurred by the service provider would not result in risk transfer.
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Contract adjustment provisions
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Contracts with adjustments for a change in scope may transfer risk if they are not merely true-up adjustments for the service provider’s actual costs.
Annual or periodic inflation adjustments are also permitted, as well as increases tied to certain performance criteria, if adjustments tied to performance are capped or otherwise limited.
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Termination provisions
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Buy-out provisions that provide for cost recovery on termination would not transfer risk.
Termination provisions need to be substantive enough to prevent either party from exiting at their discretion or risk is not transferred.
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AICPA Audit and Accounting Guide for Airlines
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