The airline industry has recently gone through drastic changes and is being restructured. Air travel has decreased due to 9/11 and other incidents, new low-cost carriers have emerged and travelers can now compare prices through the internet. 1) Our group has decided to focus on the airline industry as the accounting methods used in this particular industry are very intriguing. We have decided to compare American Airlines, a U.S. Company with Emirates, an international company because those are the two airlines we frequently travel with. American Airlines reports based on Generally Accepted Accounting Principles while Emirates reports based on International Financial Reporting Standards. The financial statements of these two companies show the similarities and difference between the FASB and IASB standards.
Group Members: Sohail Hamirani, Farida Iqbal, Mahlia Chowdhury, Dewan Chowdhury, Mia Byrd
American Airlines was founded in 1934 and is a subsidiary of the AMR Corporation. In the end of 2008 American Airlines provided airline services to 150 destinations in North America, Latin America, Europe and Asia. 2) It is one of the largest airlines in the world and contributes “more than $150 billion per year to the U.S. economy.” 3) In a normal day American Airlines flies 270,000 passengers and 3,300 flights. 4) In 2009 the company had a net loss of $1.5 billion due to a decrease in demand because of the global economic recession (AA 10-K, 1). American’s passenger revenue also decreased by 17.5% because of the “fare discounting” that happened across the industry (AA 10-K, 36). American Airlines is listed on the New York Stock Exchange and reports with Security Exchange Commission.
Emirates airlines and Dnata form the Emirates Group. Dnata is a large travel organization in the Middle East which handles services for many airlines at the Dubai International Airport.5) Emirates first flew with just two aircrafts in 1985.6) The airline is owned by the government of Dubai, which is located in United Arab Emirates. Emirates currently has 137 aircrafts and flies to 60 countries around the world. 7) It is a very small airline compared to American Airlines, but Emirates “accounts for 40% of all flight movements in and out of Dubai International Airport.” 8) Emirates financial statements are reported in accordance with IFRS.
Emirates’ monetary unit is dirhams (AED) while American Airline’s monetary unit is dollars. One dirham is equal to .272257 U.S. dollars and one dollar is equal 3.68 dirham. Emirates net profit is at the end of the 2009 fiscal year was AED 982 million ($268 million) (Emirates Annual Report, 5). The net profit of the company decreased by about 80%. Emirates said that their net profit plummeted because of increase in fuel price, increase in competition and decrease in demand due to the global recession (Emirates Annual Report, 5). Emirates earned their highest historical profits in the 2007-2008 fiscal year; thus, they knew that their profits for the 2008-2009 fiscal year would decrease. Emirates expects a slight increase in passenger growth in the coming year and is planning to implement new strategies such as starting a business rewards program (Emirates Annual Report, 5).
American Airlines investor relations section can be found under the about us link on its homepage (www.americanairlines.com). The investor relations section contains recent earnings information, 10-K’s and annual reports. American Airlines fiscal period end is December 31. The 2009 annual report is not available on its webpage, but the 2009 109 page 10-K is easily accessible and opens in a pdf form. We really liked how all of American’s financial information, from recent news releases to SEC filings, could be found all on one page. 9) The Emirates Group annual reports page can be found on the company’s homepage (www.theemiratesgroup.com). 10) The fiscal year end is March 31st; therefore, their 139 page 2009 annual report is available on their website and opens in a pdf format. If one does not want to download the entire annual report, the page has links to major sections of the report.
The first 49 pages of the AMR Corporation’s 10-K describes the different segments of the corporation and how each performed in 2009. These pages also describe AMR corporation’s properties, legal proceedings, market risk, stockholder matters and management discussion and analysis. The consolidated financial statements start on page 48. The 10-K also includes the evaluation of companies control and procedures (AA 10-K, 83). The Emirates Group annual report is very user friendly as it begins with a brief summary about the company, its goals, its profits and its plans for the future. Second, the report describes each part of the company and how each department has performed in the fiscal year. The financial report starts on page 54. Our group was intrigued by the fact that The Emirates Group had separate financial statements for the Emirates airlines, separate statements for Dnata and also included combined financial statements. This made it easy for us to know how much of The Emirates Group profit was from Dnata and how much was from the Emirates airlines. American Airlines 10-K was very dry compared to The Emirates Group annual report. Emirates’ report utilizes many graphs, charts and pictures which makes it much easier to understand the material.
Ernst & Young LLP, a firm which has a leading position in accounting industry, conducted AMR Corporation’s audit work for 2009. While doing audit work, auditors focused on AMR Corporation’s consolidated statements, cash flows, and stockholder’s equity for the year of 2007, 2008, and 2009. According to the auditor’s report, AMR Corporation prepared the consolidated statements and auditor’s only expressed their opinion about the statements (AA 10-K, 49).
Ernst & Young performed the audit work according to the standards of Public Company Oversight Board (PCAOB). The standards require planning the audit to obtain reasonable assurance that the financial statements are free of material misstatement (AA 10-K, 49). Following PCAOB’s standards, Ernst & Young gathered sufficient supporting evidence and examined it on test basis to check material elements of the financial statements. They examined the accounting principles that were followed by the managers and the significant estimates made by them as well. After evaluation, the auditors expressed that financial statements were fairly presented and are free from material misstatement. They also expressed unqualified opinion on AMR Corporation’s internal control for which they followed Internal Control-Integrated Framework which was issued by the Committee of Sponsoring Organizations of the Treadway Commission (AA 10-K, 49).
PricewaterhouseCoopers (PwC) conducted audit work for Emirates. PwC audited Emirates consolidated financial statements for the year end of 2009 which was prepared by Emirates. Their fiscal year ends on 31 March. PWC clearly stated Management’s responsibility in their audit report. Some of these responsibilities are: design, implement and maintenance of internal control, fair presentation of financial statements, fraud or error, application of accounting policies, and make accounting estimates (Emirates Annual Report, 112). They also stated that their responsibility as auditors will be to express opinion on Emirates consolidates financial statements based on their audit work.
PWC performed audit according to International Financial Reporting Standards (IFRS) (Emirates Annual Report, 112). These standards require proper planning, audit performance, and ethics to obtain reasonable assurance that the financial statements are free from material misstatement. PWC gathered enough audit evidence to check the fair presentation and disclosure of information in financial statements. They also examined internal control of Emirates to understand the risk of fraud. After their evaluation, PWC stated that Emirates financial statement was fairly presented and they followed IFRS rules.
The most noticeable difference in Ernst & Young’s and PwC’s audit report is following the Integrated Framework for internal control. Since PwC performed audit work according to IFRS standards, they were not required to follow the framework like Ernst & Young.
AMR Corporation’s management discussed the current economic condition and how that is affecting AMR in 10k. AMR Corporation faced a decrease in revenue of $3.8 billion and recorded a net loss of $1.5 billion. One of the main reasons of the loss is change in fuel price, foreign currency exchange rate, and interest rate (AA 10-K, 46). In order to support smooth flight operations and control fuel over price, AMR trades, ships, and maintain fuel storage facilities. Another way of controlling fuel price for AMR Corporation is using jet oil and heating oil hedging contracts. According to their data, there was 10% increase in fuel price in the December of 2009 and 2008. This increase caused AMR an increase of approximately $499 million Air Craft fuel expense (AA 10-K, 46).
Change of foreign currency exchange rate is another problem that AMR Corporation is currently facing. Because of this change in exchange rate, the corporation faced a decrease in operating income of approximately $136 million. The major currency’s AMR deals with are: British pound, Euro, Canadian dollar, Japanese yen and different Latin American currencies (AA 10-K, 46).
AMR’s interest income from cash and short-term investment is being affected by the change in interest rate (AA 10-K, 47). The corporation’s largest change in interest rate comes from London Interbank Offered Rate (LIBOR) (AA 10-K, 47). The management discussed that if they increased their average interest rate in 2010 by 10% over the rate on December 31 2009, the company’s interest expense would have increased by approximately $13 million. They also mentioned that in that scenario, interest income from cash and short-term investments would have increased by approximately $7 million. AMR’s management determined these figures by considering the impact of change in the interest rate of December 2008 and 2009’s variable rate long-term debt, cash, and short-term investment balances (AA 10-K, 47).
Emirates management also talked about similar situation in their management report. They mentioned that according to International Air Transport Association (IATA), there is a worldwide predicted loss of US $4.7 billion (Emirates Annual Report, 4). Unlike some of the competitors, Emirates is making profits but the percentage is lower than the previous years. Emirates net profit was US$1.49 billion which is a 72% decrease of their previous year’s profit (Emirates Annual Report, 5).
Emirates mentioned fuel price as their main reason for the decrease in profit. According to their data, fuel price has raised approximately US $147 per barrel over the past six months (Emirates Annual Report, 5). Another reason they mentioned is decline in number of passengers which is directly affecting their revenue. Even though there is a low passenger rate, Emirates is hoping to have an overall growth of 3.8% by the end of next year (Emirates Annual Report, 5).
Even though Emirates and AMR Corporation’s management report are similar, there is one noticeable difference I found in their report. One of the main concerns the AMR Corporation mentioned is change in interest rate, but Emirates management did not mention anything about this.
There are a couple of differences in how inventory is recorded under the financial accounting standards (FAS 151) 11) compared to the international accounting standards (IAS 2).12) FAS 151 amends ARB no. 43, chapter 4 as FAS 151 aligns more with IAS 2. 13) One difference between the two statements is that U.S. GAAP follows the “floor and ceiling test” 14) to record inventory while for IAS the inventory is marked at lower of cost or net realizable value (IAS 2, 9). Also, IAS 2 allows “reversal of inventory write downs” while GAAP does not allow reversals for annual reports (IAS 2, 34). Furthermore, IAS 2 paragraph 25 says, “the cost of inventories….shall be assigned by using first-in, first-out (FIFO) or weighted average cost formula.” It does not allow the use of LIFO unlike GAAP.
Inventory is not a huge number on the balance sheets of both Emirates and American Airlines as compared to flight equipment since both these airlines are in the service business and do not have much inventory. Emirates uses weighted average costs basis method for inventories like engineering, in-flight consumables and other inventory. FIFO is used on consumer goods inventory (Emirates Annual Report, 81). Emirates airlines inventory amounts to AED 1,052,573 or $286,563 (Emirates Annual Report, 94). Inventory for AMR Corporation includes “spare parts, materials and supplies relating to flight equipment [that] are carried at average acquisition cost” (AA 10-K, 56). Inventory is expensed as it is used to earn revenue to better match efforts with accomplishments 15) (AA 10-K, 56). American Airlines inventory less obsolescence amounts to $557,000,000 (AA 10-K, 51). There does not seem to be any significant differences between how inventory is recorded for Emirates versus American Airlines.
The rules for fixed assets are consistent between FASB and IASB. They define assets similarly and even explain what could be capitalized in a similar fashion. According to IAS 16, “All the directly attributable costs necessary to bring the asset into working condition should be capitalized” (IAS 16, Property, plant and equipment) 16), whereas, FASB talks about all necessary costs to bring an asset to its state and place of intended use. They also have similar stance about the depreciation method. They explain that all tangible assets should be depreciated over its estimated useful life. But in IAS 16, it also mentions that the life expectancy and the value of an asset should be reviewed at least once every financial year end, and if there is a difference, then that value should be accounted for according to IAS 8 (IAS 16, Property, plant and equipment).
The rules of the SOP are very similar to those of the revised IAS 16, with three exceptions:
(The CPA Journal) 17)
On December 31, 2009, American Airlines owned or leased 610 aircraft's in total. Out of the 610, 349 were owned, 80 were capital leased, and 181 were operating leased. On average the aircraft's had an age of 15 years. AMR Eagle at the end of the year had 280 air crafts out of which they owned 241, and operating leased 39. Their aircraft's had an average life of 9 years (AA 10-K, 20-21).
The Company leases or has built as leasehold improvements on leased property: most of its airport and terminal facilities in the U.S. and overseas; its training facilities in Fort Worth, Texas; its principal overhaul and maintenance bases at Tulsa International Airport (Tulsa, Oklahoma), Kansas City International Airport (Kansas City, Missouri) and Alliance Airport (Fort Worth, Texas); its regional reservation offices; and local ticket and administration offices throughout the system. In October 2009, AMR announced the planned closure of its Kansas City overhaul and maintenance base to create a more flexible, cost-efficient operation that improves flow and takes into account the long-term impact of the recession on travel, deep capacity cuts across the industry, and a corresponding decline in the maintenance, repair and overhaul (MRO) business, along with the changes to the Company’s network and corresponding fleet size. The Company owns its headquarters building in Fort Worth, Texas, on which a mortgage loan is payable. American has entered into agreements with the Tulsa Municipal Airport Trust; the Alliance Airport Authority, Fort Worth, Texas; the New York City Industrial Development Agency; and the Dallas/Fort Worth, Chicago O'Hare, Newark, San Juan, and Los Angeles airport authorities to provide funds for constructing, improving and modifying facilities and acquiring equipment which are or will be leased to the Company. The Company also uses public airports for its flight operations under lease or use arrangements with the municipalities or governmental agencies owning or controlling them and leases certain other ground equipment for use at its facilities (AA 10-K, 21).
The chart below will show the depreciable life for the following items:
|American jet aircraft and engines||20-30 years|
|Other regional aircraft and engines||16-20 years|
|Major rotable parts, avionics and assemblies||Life of equipment to which applicable|
|Improvements to leased flight equipment||Lesser of remaining lease term or expected useful life|
|Buildings and improvements||5-30 years or term of lease|
|Furniture, fixtures and other equipment||3-10 years|
|Capitalized software||3-10 years|
(AA 10-K, 56)
Whereas, Emirates property, plant and equipment is stated at cost less accumulated depreciation. Cost consists of purchase cost, together with any incidental expenses of acquisition. The depreciation is calculated on a straight-line basis over the estimated life of the asset. A chart from the annual report shows the estimated life expectancy and residual value:
|Passenger aircraft- new||15 years (residual value 10%)|
|Passenger aircraft- used||8 years (residual value 10%)|
|Aircraft engines and parts||5 - 15 years (residual value 0 - 10%)|
|Buildings||5 - 20 years|
|Other property, plant and equipment||3 - 15 years or over the lease term, if shorter|
(Emirates Annual Report, 79 & 89)
FAS 13 (ownership transfer and bargain purchase option) used to determine if a lease is a capital or operating lease are identical to those listed in IAS 17. Both IASB and FASB recognize the concept of capital (finance) and operating leases; although the bright-line rule used by FASB creates a significant difference from the rules of IASB. The “bright-line” rule involves two tests to clarify if a lease is a capital or an operating lease. If the lease life exceeds 75% of the life of the asset or if the present value of the lease payments, discounted at an appropriate discount rate, exceeds 90% of the fair market value of the asset, the lease is a capital lease. The IASB prefers a “facts and circumstances” approach that entails more judgment calls (Technical Summary)18)
AA leases various types of equipment and property, primarily aircraft and airport facilities. At December 31, 2009, the Company was operating 181 jet aircraft and 39 turboprop aircraft under operating leases, and 80 jet aircraft under capital leases. The aircraft leases can generally be renewed at rates based on fair market value at the end of the lease term for one to five years. Some aircraft leases have purchase options at or near the end of the lease term at fair market value, but generally not to exceed a stated percentage of the defined lessor's cost of the aircraft or a predetermined fixed amount.
During 2009, the Company raised $768 million through sale leasebacks of certain aircraft which have lease terms of six to seven years. Gains of $28 million on sale leasebacks are being amortized over the respective remaining lease terms, while non-recurring charges related to losses on certain sale leasebacks of vintage aircraft of $88 million were realized in 2009 and included in other operating income (AA 10-K, 61-62).
Emirates capitalize their finance leases at the commencement of the lease at the lower of the present value of the minimum lease payments or the fair value of the leased asset. Whereas, leases, where a significant portion of risks and rewards of ownership are retained by the lessor, are classified as operating leases (Emirates Annual Report, 80). According to Emirates’ annual report for 2008-2009, they had AED 369.3 million in finance leases (Emirates Annual Report, 89). Their Aircraft Operating Leases was AED 3,797 million, which was about 9.2% of their entire expenses. On 31st March, 2009, Emirates had 127 planes in operation, 153 on firm order, and 70 on option. Emirates also paid AED 39 million for Operating Lease Rentals, which was about 1.4% of their total expenses (Emirates Annual Report, 62-68).
The accounting treatment for intangible assets is an area of significant difference between IFRS and US GAAP. Under IFRS, International Accounting Standard (IAS) 38, Intangible Assets, is the primary accounting standard for intangible assets which provides a very principles-based approach. 19) On the other hand, relevant U.S. GAAP statement 142 consists of very specific and detailed guidance, which denotes a substantial contrary overall approach to the subject of intangibles. 20) The most interesting aspect on comparing the two accounting methods was with respect to the internally generated intangible assets. The IFRS reviewing the developmental costs as the costs of the asset to bring it to state and place of intended use, whereas, the US GAAP reviewing those costs as considerable efforts to achieve future benefits and thereby, expensing it.
FAS 142 provides the users of financial statements with information about intangible assets, amortization, and impairment losses. 21) The changes made in FAS 142, compared to the APB Opinion 17, depict financial statements as an improved reflection of the future potential outcomes of intangible assets (FAS 142 Summary). This enables the prediction of future outcomes to be more relevant and information that others can rely on. 22)
For example, under, US GAAP research and development expenditures are all expensed as incurred and are included in operating cash flows, whereas, under IFRS research costs are expensed as incurred, but development costs are capitalized and amortized and the portion capitalized in a particular period is included in investing cash flows for that period. 23) The statement goes on to define measurement after recognition, useful life, and intangible assets with finite useful lives. IASB represents more of a concept-based interpretation of standards, as we learned in class, U.S. GAAP contains many rules; thus, hardly leaves anything related to intangible assets up to the decision of the accountant.
Emirates Airlines intangible assets represents goodwill, service rights, trade names, computer software, and contractual rights (Emirates Annual Report, 79.3). All intangible assets other than goodwill are amortized on a straight line basis over its estimated useful life. Goodwill represents the excess of the cost of an acquisition over the fair value of the share of the net identifiable assets acquired by Emirates in its subsidiaries at the date of acquisition (Emirates Annual Report, 89.2). In the case of a subsequent exchange transaction where control is already established, goodwill is calculated with reference to the net asset value at the date of transaction. Goodwill is tested annually for impairment and carried at cost less accumulated impairment losses. For the purpose of testing goodwill for impairment, goodwill amounting to AED 159.2 million (2008: AED 159.2 million) is allocated as the consumer goods cash generating unit, AED 25.1 million (2008: AED 25.1 million) is allocated to the food and beverages generating unit and AED 368.5 million (2008: AED 368.5 million) is allocated to the in-flight catering services cash generating units. These cash generating units are based in Dubai (Emirates Annual Report, 89.2).
On the other hand, American Airlines intangible assets include route acquisition cost, airport operating gate lease rights that represent the purchase price attributable to route authorities (including international airport take-off and landing slots), domestic airport take-off and landing slots and airport gate leasehold rights acquired (AA 10-K, 56.1.4). These have indefinite-lives and are tested for impairment rather than amortized in accordance with U.S. GAAP. The company does not represent any amounts for goodwill (AA 10-K, 56.1.4).
The cost of measurement of assets varies differently for both of the companies. Emirates airlines amortizes its intangibles whereas, US GAAP tests for impairment with its intangibles. However, the financials for both the companies does not provide adequate disclosure on the contents of specific intangibles. In conclusion, even though main difference between American standards and International standards is with respect to research and development costs, neither company had R & D listed on their balances sheets as intangible assets, so we were not able to directly see the difference in the financial statements.
FASB states that “impairment is the condition that exists when the carrying value amount of a long-lived asset (group asset) exceeds its fair value. An impairment loss should be recognized only if the carrying amount of a long lived asset (group asset) is not recoverable and exceeds fair value.” 24) The IASB’s definition is very similar as it expresses that “an asset is impaired when its carrying amount exceeds its recoverable amount.” 25) In principle, what they intend on accomplishing may be the same, but there are a few key differences in their methods of recording as well as recognizing impairment.
While FASB requires a two step process to test impairment, the IASB requires one. In step one, FASB “requires a company to estimate the future undiscounted cash flows expected from the use of that asset and its eventual disposition. If the sum of the expected future net cash flows is less than the carrying amount of the asset, the company considers that asset impaired.” 26) Furthermore, “If an impairment has occurred, step two would determine the loss by subtracting the fair value from the carrying amount of the asset.” 27) IASB’s process simply requires that “impairment loss be calculated if “impairment indicators” exist… the impairment loss is calculated as the amount by which the carrying amount of the asset exceeds it recoverable amount.” 28)
According to American Airlines’ 10-K report, “the company records impairment charges on long lived assets used in operations when events and circumstances indicate that the assets may be impaired, the undiscounted cash flows estimated to be generated by those assets are less than the carrying amount of those assets and the net book value of the assets exceeds their fair estimated value.” (AA 10-K, 42.2) American Airlines uses certain assumptions, “including, but not limited to: estimated fair value of the assets, and estimated future cash flows expected to be generated by the assets, generally evaluated at a fleet level, which are based on a fleet level, which are based on additional assumptions such as asset utilization, length of service and estimated sales values. A change in the company’s fleet plan has been the primary indicator that has resulted in an impairment charge in the past.” (AA 10-K, 42.2)
Most of American Airlines fleets are depreciated over a 30 year life. This is subject to change as determined by “unforeseen events” that may occur. The recent recession was one of those events that led the company to record an impairment loss on two aircraft during the last financial period. “The company’s plan to sell certain of its Embraer RJ-135 aircraft was no longer feasible at the amount for which these aircraft had been valued.” (AA 10-K, 42.4) Therefore, “the Company reclassified these aircraft from held for sale to held for use, tested them for impairment and concluded the carrying values of certain of its Embraer RJ-135 aircraft were no longer recoverable.” (AA 10-K, 42.4) As a result, during the fourth quarter of 2009, “the Company recorded an impairment charge of $42 million to write these aircraft down to their estimated fair values.” (AA 10-K, Note 2 to the consolidated financial statements)
American Airlines also “perform annual impairment tests on its International slots and route authorities.” (AA 10-K, 42.6) The company performs such test annually or when events trigger the need for testing. Such “triggering” events “may include significant changes to the Company’s network or capacity, or the implementation of open skies agreements in countries where the Company operates flights.” Test performed in the fourth quarter resulted in “an impairment charge of $96 million to write down the values of these and certain other routes and slots to a fair value of $28 million.” (AA 10-K, 79, note 11)
Emirates' new passenger aircraft are depreciated over a 15 year period and their used passenger aircraft are depreciated over an 8 year period. The residual values and useful lives are evaluated at each balance sheet date, “when the carrying amount of an intangible asset is greater than its estimated recoverable amount, it is written down immediately to its estimated recoverable amount and is reviewed at each balance sheet date for possible reversal of the impairment loss.” (Emirates Annual Report, 79.9) This is in accordance with IASB standards as IAS 36 declares “An impairment loss recognized in prior periods for an asset… shall be reversed if, and only if, there has been a change in the estimates used to determine the asset’s recoverable amount since the last impairment loss was recognized.” 29) Emirates report that “goodwill represents the excess of the cost of an acquisition over the fair value of the share of the net identifiable assets acquired by Emirates in its subsidiaries at the date of acquisition.” (Emirates Annual Report, 80.9) “In the case of a subsequent exchange transaction where control is already established, goodwill is calculated with reference to the net asset value at the date of transaction. Goodwill is tested annually for impairment and carried at cost less accumulated impairment losses. For the purpose of impairment testing, goodwill is allocated to cash generating units that are expected to benefit from the business combination in which the goodwill arose.” (Emirates Annual Report, 80.10)
Another significant difference between FASB and IASB is the allowance for reversal of impairments. As stated above, Emirates' annual report states that intangible assets are reviewed at each balance sheet date for possible reversal of impairment loss. On the other hand, FASB does not permit such reversals as it clearly states “If an impairment loss is recognized, the adjusted carrying amount of a long-lived asset shall be its new cost basis. For a depreciable long-lived asset, the new cost basis shall be depreciated (amortized) over the remaining useful life of that asset. Restoration of a previously recognized impairment loss is prohibited.” (SFAS 144, 15) It must be noted that the reversals that the IASB refers to are “all long-lived assets (other than goodwill),” 30) under both standards, goodwill impairment cannot be reversed in a subsequent period.
Under IFRS, the pronouncement that provides guidance for the accounting for income taxes is International Accounting Standard (IAS) 12, Income Taxes, whereas the U.S. GAAP provides primary standard dealing with the accounting for income taxes is FASB Statement No.109, Accounting for Income Taxes. Both IAS 12 and Statement No. 109 are based on the balance sheet liability approach whereby an entity recognizes deferred tax assets and liabilities for temporary differences and for operating loss and tax credit carry forwards. 31)
Emirates records the Income taxes relating to subsidiary companies only which are subject to tax. Deferred tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and when the deferred taxes relate to the same income tax authority (Emirates Annual report, 130.2). For 2009, the deferred income tax liability is on account of accelerated tax depreciation. A deferred tax asset has not been recognized in respect of carried forward tax losses amounting to AED 391.3 million (2008: AED 351.0 million) (Emirates Annual report, 100.2). However, deferred income tax is determined using tax rates (and laws) that have been enacted or substantially enacted by the balance sheet date and are expected to apply when the related deferred income tax asset is realized or the deferred income tax liability is settled.
On the other hand, one noticeable difference with American Airlines is with respect to the valuation allowance account which is not evident in IFRS reporting. American Airlines records a deferred tax asset valuation allowance when it is more likely than not that some portion or all of its deferred tax assets will not be realized unlike IFRS reporting. The Company considers its historical earnings, trends, and outlook for future years in making this determination. For 2009, it had a deferred tax valuation allowance of $2.9 billion (AA 10-K, 45.5).
In conclusion, numerous differences arise because both frameworks have various exceptions to the basic principle. Therefore, income taxes are frequently identified as a source of significant reconciling items when comparing US GAAP and IFRS.
We all agree that both the companies do a fine job of following their respective standards. Though in some areas they have different procedures, such as asset impairment loss reversal, the principles behind their rules are aligned. Emirates' seems to put more focus on the user of the annual report as they deliberately make it pleasing to the eye and separate the operations of their subsidiary, Dnata, which gives a clear understanding of how they have performed individually.
Emirates' annual report is also less complicated to comprehend. The company's report is truly representative of the standards they follow as they are more principles based. They make it easier for users to understand with straight-forward explanations. American Airlines, on the other hand, produced a report that is definitely more rules based and acknowledges those rules along with each financial statement footnotes and disclosure. This may be a bit intimidating for the user as the rules and standards are sometimes wordy and confusing. Although they both mention the standards they follow, Emirates gives the explanation one time in the beginning of the report.
Although there are many similarities between FASB and IASB, there are a few noticeable differences that reflect in the reports we have examined. Such differences will prove to be interesting to adapt to in the near future. It is believed that the change will be beneficial to the users of the reports, but what's most intriguing to us is the degree in which they will be followed.
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