Introduction:
American Airlines is a major airline in the US that operates on a global scale. The airline has a large fleet of aircraft, which it leases from leasing companies. In 2016, the Financial Accounting Standards Board (FASB) issued a new accounting standard for leases, known as Accounting Standards Update (ASU) No. 2016-02, which requires lessees to recognize all leases on their balance sheet. The new standard presents several challenges for American Airlines, which must now recognize its lease obligations on its balance sheet. This case analysis aims to examine the accounting issues faced by American Airlines in light of the new leasing standard.
Case Issue:
The main issue faced by American Airlines is how to account for its leases under the new leasing standard. The airline leases a large number of aircraft, and under the new standard, it must recognize all of its lease obligations on its balance sheet. This presents several challenges for the airline, as it must determine the appropriate lease term, discount rate, and other lease-related expenses to be recognized on its balance sheet.
Case Analysis:
Under the new leasing standard, lessees are required to recognize all leases on their balance sheet as right-of-use (ROU) assets and lease liabilities. American Airlines has several types of leases, including operating leases, finance leases, and sale-leaseback transactions. The accounting treatment for each type of lease is different, and the airline must carefully analyze each lease to determine the appropriate accounting treatment.
The first step in accounting for leases under the new standard is to identify all leases that meet the definition of a lease. Once the leases are identified, the next step is to determine the lease term and the discount rate to be used in calculating the present value of the lease payments. American Airlines has a large number of leases, and determining the appropriate lease term and discount rate for each lease can be a complex and time-consuming process.
Another challenge for American Airlines is determining the lease-related expenses to be recognized on its balance sheet. These expenses include amortization of the ROU asset, interest expense on the lease liability, and variable lease payments. The airline must carefully analyze each lease to determine the appropriate lease-related expenses to be recognized on its balance sheet.
Conclusion:
The new leasing standard presents several challenges for American Airlines, which must now recognize all of its lease obligations on its balance sheet. The airline must carefully analyze each lease to determine the appropriate lease term, discount rate, and other lease-related expenses to be recognized on its balance sheet. The airline must also ensure that its financial statements comply with the new leasing standard and provide sufficient disclosures regarding its lease obligations.
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Recommendations:
To address the challenges presented by the new leasing standard, American Airlines should consider the following recommendations:
- Develop a comprehensive lease accounting policy that outlines the accounting treatment for each type of lease.
- Establish a dedicated team to manage the lease accounting process and ensure compliance with the new leasing standard.
- Implement a lease accounting software solution to streamline the lease accounting process and ensure accuracy and consistency in lease accounting.
- Provide sufficient disclosures regarding the airline’s lease obligations in its financial statements to ensure transparency and compliance with regulatory requirements.
- Regularly review and update the lease accounting policy and procedures to ensure compliance with changes in accounting standards and regulations.
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