Deprecation at Delta Airlines and Singapore Air Lines

Deprecation at Delta Airlines and Singapore Air lines

Depreciation helps match the expense of using long lived assets with the revenues the assets helped to produce> what means is that Delta ns Singapore pole Air line depreciates one of its airplanes, it is trying to match the cost of air flight to the revenue that air craft helped to produce. Because air crafts can be an item used for more than one income statement period, Delta and Singapore Airlines don't recognize the air crafts entire cost as an expense immediately. Instead, the companies record them as assets on the balance sheet. Then, in each year of the assets useful life, the companies should recognize a portion of the Item's costs as an expense.

At the end of the useful life of fixed assets the businesses will dispose, and any amount received from disposal will represent its residual value. This may be difficult to estimate in practice. How ever, an estimate has to be made. If it is unlikely to be significant amount, a residual value of zero will be assumed. The cost of fixed assets less its estimated residual value represents the total amount to be depreciated over its estimated useful life.

Delta Air Line

Item Prior to July 1, 1986 July 1, 1986-march 31, 1993 April 1, 1993- present

Method Straight line Straight line Straight line

Residual Value 10% 10% 5%

Useful Life 10years 15years 20 years

Depreciation expense per $100 of gross air craft value( annually) $100 x 0.1 = $10

$100-$10 = $90

$90/10yrs= $9 per yr $100 x 0.1 = $10

$100-$10 = $90

$90/15yrs= $6 per yr $100 x 0.1 = $10

$100-$10 = $90

$90/20yrs= $4.75 per yr

Singapore

Item Prior to July 1, 1989 April 1, 1989- present

Method Straight line Straight line

Residual Value 10% 20%

Useful Life 8years 10years

Depreciation expense per $100 of gross air craft value( annually) $100 x 0.1 = $10

$100-$10 = $90

$90/8yrs= $11.25per yr $100 x 0.2 = $20

$100-$20 = $80

$90/10yrs= $8 per yr

The amount each company should recognize as expense is given in a given year depends on the following factors

* Company estimate the assets useful life independently

* Residual value

* Depreciation methods

Delta and Singapore air line use the straight line method to calculate annual depreciation expenses, this allow each company to evaluate its residual value and useful life. For example April 1, 1989 Singapore Airline was paying almost double ($ 11.25 / year) in depreciation expanse to delta Air lines from July 1, 1986-march 31, 1993($ 6 / year), reason being is that

1. Estimation was based on low useful life (8-10 yr) compare to Delta air line 10-20 yrs.

2. The increase of residual value of Delta Air line from 10%- 5%

The above two factors are the results of Singapore Air line paying higher annual deprecation expanse, which has an effects on the lower net income for the company.

The following reasons may result company to depreciating an aircraft

* Following Industry norms

* Assets become obsolete

* Growth of a company that is a company may outgrow to a number of air crafts.

In salvaging the value of a company, several factors will determine to whether or not a company expect to discontinue, sell or even trade its assets at the end of its useful life.( need more explanation).

The higher the annual depreciation indicates the lower tax expense to Singapore Air line. However, the lower the annual depreciation higher net income for Delta Air line. Annual depreciation calculations method can be different to each airline industry in time of depreciation. For example Singapore and Delta airlines share Aircrafts A310-300 and A310-200, whereas Singapore air line own its own crafts and Delta lease almost half, so different methods will be use at times of annual depreciation calculations.

Assuming the average value of flight equipment Delta had in 1993, the difference in depreciation assumptions for April 1, 1993 resulted a reduction 0f 1.25% (6-4.75) of the net income .This is because Delta has decide to depreciate its equipment value over a long period of time, and therefore reducing the salvage value at the end of the depreciable life. Exhibit 1 shows that 1993 there is an increase in the depreciation expense of 3.3% as compared to that in 1992. This could be because the effective change in depreciation didn't occur until April 1, 1993 and the income statement is dated for the year ending June 30, 1993.

If Delta Airlines assumed the depreciation assumptions of Singapore Airlines, Delta's depreciation expense would increase 6.5% ($11.25 - 4.75) prior to 1989 and 3.25% ($8 - 4.75) after 1989.

Singapore Airlines maintains depreciation assumptions that are very different from Delta's. The loss is in net income because of the higher expense. The gain is in residual value because the estimated useful life is less than Delta's, which means the equipment will be worth more after being fully depreciated. The company's overall strategy was to continue with its expansion plans regardless of the difficult times of the airline industry. The change in depreciation comes from a review