The Impact of Airline Depreciation Accounting Choices on

School: Delaware State University - Course: ACCT 302 - Subject: Accounting

Jared Bailey Accounting for Decision-Making Behavioral Implications of Airline Depreciation Accounting Policy Choices-Case 8 The work culture and employee morale can fluctuate and is very sensitive in some workplaces. It can easily go from a motivated team to a checked out one that is not producing results. There are three different types of accounting policy choice that can have an impact on employees' behaviors. Three broad types of choices are depreciation patterns, estimated useful lives and residual values. In this case, using the straight-line depreciation method, AMR Corporation (Parent company of American Airlines) provides the same depreciation year after year. However, accelerated depreciation provides a higher depreciation at the start of the business and a lower depreciation at the end of the year. So, when comparing the two methods, the straight-line method is slower because it deals with conservative accounting but when it comes to the accelerated method, it is faster because it deals with an aggressive accounting policy. Estimated useful lives can change the company because the airline's predictions were higher, the depreciation amount would be lower and if they were lower, the depreciation amount would be higher. Now when it comes to residual values, when they're high the depreciation amount is lower, and vice versa. The effect of residual value is like the estimated useful life. For example, like what was shown in the case, managers making decisions on replacement of aircraft in service, pricing, evaluations of routes and evaluation of managers.

a.Replacement of aircraft in service; The replacement of aircraft service is influenced by two factors: aircraft depreciation and residual value. When AMR employs the straight- line method, the depreciation amount is higher, resulting in lower asset replacement costs. b.Pricing, assuming that prices are at least somewhat dependent on costs; Here, we make the assumption that costs affect pricing. So, we might conclude that increased depreciation results in increased costs. Depreciation costs for the asset are low if the expected useful life and residual values are high. This implies that it will reduce the cost, which will cause the price to decrease. c.Evaluations of routes or lines of business; Here, we make the assumption that costs affect pricing. We might conclude that increased depreciation results in increased costs. Depreciation costs for the assets are low if the expected useful life and residual values are high. This implies that it will reduce the cost, which will cause the price to decrease. d.Evaluations of managers, assuming that negotiated budgets provide the primary standard of performance.As a result of the aircraft's conservative policies, both the price decrease and the depreciation value will occur gradually. If I was asked for my advice on what the managers of a company having issues choosing between liberal and conservative depreciation accounting, I would absolutely agree that the American airline firm should maintain three sets of books in order to reflect the assets' decreasing value. They will benefit from keeping items, so keeping them is a wise choice. Even though maintaining three sets of books will cost money, the corporation will benefit from it and it won't do any harm.

I think if managers would not agree to using a third set of books for their company's accounting, then I believe in this instance, the airline should employ the straight-line depreciation approach. The salvage value and the estimated total usable life of the asset are taken into account when determining the asset's worth. The managers' work is made easier by this strategy because the depreciation amount is constant. Future forecasting is simpler. I advise management to adopt conservative aircraft depreciation accounting policies as a result. In conclusion, future prediction would be much easier for managers if they utilized the straight-line approach if they do not want to have 3 books, but the company choosing to use three books for their assets would be ideal. Not only would management job get easier, but it would also help showcase predictions with forecasting. The transition would be smooth, and costs will be easier to calculate. So therefore, I recommend airline to be conservative with their depreciation methods.