A u d i t & A c c o u n t i n g g u i d e Airlines With conforming changes as of March 1, 2013 12847-359 AAG-AIR_title page.indd 1 4/12/13 3:27 PM Copyright © 2013 by American Institute of Certified Public Accountants, Inc. New York, NY 10036-8775 All rights reserved. For information about the procedure for requesting permission to make copies of any part of this work, please e-mail [email protected] with your request. Otherwise, requests should be written and mailed to the Permissions Department, AICPA, 220 Leigh Farm Road, Durham, NC 27707-8110. 1 2 3 4 5 6 7 8 9 0 AAP 1 9 8 7 6 5 4 3 ISBN 978-1-93735-231-8 AAG_AIR_Copyright.indd 1 4/12/13 2:50 PM iii Preface About AICPA Audit and Accounting Guides This AICPA Audit and Accounting Guide has been developed by the AICPA Airline Guide Task Force to assist management in the preparation of their financial statements in conformity with U.S. generally accepted accounting principles(U.S.GAAP)andtoassistpractitionersinperformingandreporting ontheirauditengagements. TheFinancialReportingExecutiveCommittee(FinREC)isthedesignatedse- niorcommitteeoftheAICPAauthorizedtospeakfortheAICPAintheareasof financialaccountingandreporting.Conformingchangesmadetothefinancial accountingandreportingguidancecontainedinthisguideareapprovedbythe FinRECChair(orhisorherdesignee).Updatesmadetothefinancialaccount- ingandreportingguidanceinthisguideexceedingthatofconformingchanges are approved by the affirmative vote of at least two-thirds of the members of FinREC. Thisguidedoesthefollowing: (cid:2) IdentifiescertainrequirementssetforthinFinancialAccounting Standards Board (FASB) Accounting Standards Codification™ (cid:2) (ASC). Describes FinREC's understanding of prevalent or sole industry practice concerning certain issues. In addition, this guide may indicatethatFinRECexpressesapreferencefortheprevalentor soleindustrypractice,oritmayindicatethatFinRECexpresses apreferenceforanotherpracticethatisnottheprevalentorsole industrypractice;alternatively,FinRECmayexpressnoviewon (cid:2) thematter. Identifies certain other, but not necessarily all, industry prac- tices concerning certain accounting issues without expressing (cid:2) FinREC'sviewsonthem. Provides guidance that has been supported by FinREC on the accounting, reporting, or disclosure treatment of transactions or eventsthatarenotsetforthinFASBASC. AccountingguidancefornongovernmentalentitiesincludedinanAICPAAudit andAccountingGuideisasourceofnonauthoritativeaccountingguidance.As discussed later in this preface, FASB ASC is the authoritative source of U.S. accountingandreportingstandardsfornongovernmentalentities,inaddition to guidance issued by the Securities and Exchange Commission (SEC). Ac- countingguidanceforgovernmentalentitiesincludedinanAICPAAuditand Accounting Guide is a source of authoritative accounting guidance described incategory(b)ofthehierarchyofGAAPforstateandlocalgovernmentalenti- ties,andhasbeenclearedbytheGovernmentalAccountingStandardsBoard (GASB).AICPAmembersshouldbepreparedtojustifydeparturesfromGAAP as discussed in Rule 203, Accounting Principles (AICPA, Professional Stan- dards,ETsec.203par..01). AAG-AIR iv AuditingguidanceincludedinanAICPAAuditandAccountingGuideisrecog- nized as an interpretive publication pursuant to AU-C section 200, Overall Objectives of the Independent Auditor and the Conduct of an Audit in Ac- cordance With Generally Accepted Auditing Standards (AICPA, Professional Standards).Interpretivepublicationsarerecommendationsontheapplication of generally accepted auditing standards (GAAS) in specific circumstances, includingengagementsforentitiesinspecializedindustries. An interpretive publication is issued under the authority of the AICPA Au- ditingStandardsBoard(ASB)afterallASBmembershavebeenprovidedan opportunity to consider and comment on whether the proposed interpretive publicationisconsistentwithGAAS.ThemembersoftheASBhavefoundthe auditingguidanceinthisguidetobeconsistentwithexistingGAAS. Although interpretive publications are not auditing standards, AU-C section 200 requires the auditor to consider applicable interpretive publications in planningandperformingtheauditbecauseinterpretivepublicationsarerele- vanttotheproperapplicationofGAASinspecificcircumstances.Iftheauditor doesnotapplytheauditingguidanceinanapplicableinterpretivepublication, the auditor should document how the requirements of GAAS were complied withinthecircumstancesaddressedbysuchauditingguidance. TheASBisthedesignatedseniorcommitteeoftheAICPAauthorizedtospeak fortheAICPAonallmattersrelatedtoauditing.Conformingchangesmadeto theauditingguidancecontainedinthisguideareapprovedbytheASBChair(or hisorherdesignee)andtheDirectoroftheAICPAAuditandAttestStandards Staff. Updates made to the auditing guidance in this guide exceeding that of conformingchangesareissuedafterallASBmembershavebeenprovidedan opportunitytoconsiderandcommentonwhethertheguideisconsistentwith theStatementsonAuditingStandards(SAS). Attestation guidance included in an AICPA Audit and Accounting Guide is recognizedasanattestationinterpretationasdefinedinATsection50,SSAE Hierarchy (AICPA, Professional Standards). Attestation interpretations are recommendationsontheapplicationofStatementsonStandardsforAttesta- tion Engagements (SSAEs) in specific circumstances, including engagements for entities in specialized industries. Attestation interpretations are issued under the authority of the ASB. The members of the ASB have found the attestationguidanceinthisguidetobeconsistentwithexistingSSAEs. Apractitionershouldbeawareofandconsiderinterpretivepublicationsappli- cable to his or her attestation engagement. If the practitioner does not apply the guidance included in an applicable AICPA Audit and Accounting Guide, thepractitionershouldbepreparedtoexplainhowheorshecompliedwiththe SSAEprovisionsaddressedbysuchguidance. TheASBisthedesignatedseniorcommitteeoftheAICPAauthorizedtospeak fortheAICPAonallmattersrelatedtoattestation.Conformingchangesmade to the attestation guidance contained in this guide are approved by the ASB Chair (or his or her designee) and the Director of the AICPA Audit and At- test Standards Staff. Updates made to the attestation guidance in this guide exceedingthatofconformingchangesareissuedafterallASBmembershave beenprovidedanopportunitytoconsiderandcommentonwhethertheguide isconsistentwiththeSSAEs. AAG-AIR v Recognition 2013GuideEdition AICPASeniorCommittees AuditingStandards FinancialReportingExecutive Board Committee IleneKassman RandolphP.Green BruceP.Webb,Chair RichardC.Paul,Chair AICPAStaff LieseFaircloth TechnicalManager AccountingandAuditingPublications The AICPA gratefully acknowledges those who reviewed and otherwise con- tributedtothedevelopmentofthisguide:MichaelCarreon,DaveW.Dickson, CraigJ.Isakson,andBertNappier. Guidance Considered in This Guide This edition of the guide has been modified by the AICPA staff to include certainchangesnecessaryduetotheissuanceofauthoritativeguidancesince the guide was originally issued, and other revisions as deemed appropriate. AuthoritativeguidanceissuedthroughMarch1,2013,hasbeenconsideredin thedevelopmentofthiseditionoftheguide.Authoritativeguidancediscussed inthetextoftheguide. Authoritativeguidancethatisissuedandeffectiveforentitieswithfiscalyears endingonorbeforeMarch1,2013,isincorporateddirectlyinthetextofthis guide.Thepresentationofauthoritativeguidanceissuedbutnotyeteffective asofMarch1,2013,forentitieswithfiscalyearsendingafterthatsamedateis beingpresenteddifferentlythaninpasteditionsofthisguide.Thisinformation isbeingpresentedasaguidanceupdate,whichisashadedareathatcontains informationonthenewguidance,whereappropriate.Thedistinctpresentation ofthiscontentisintendedtoaidthereaderindifferentiatingcontentthatmay notbeeffectiveforthereader'spurposes. Thisguideincludesrelevantguidanceissueduptoandincludingthefollowing: (cid:2) FASBAccountingStandardsUpdateNo.2013-03,BalanceSheet (Topic 210); Clarifying the Scope of Disclosures about Offsetting (cid:2) AssetsandLiabilities SASNo.127,OmnibusStatementonAuditingStandards—2013 (cid:2) (AICPA,ProfessionalStandards) InterpretationNo.1,"DatingtheAuditor'sReportonSupplemen- taryInformation,"ofAUsection551,SupplementaryInformation inRelationtotheFinancialStatementsasaWhole(AICPA,Pro- (cid:2) fessionalStandards,AUsec.9551par..01–.04) Statement of Position 12-1, Reporting Pursuant to the Global Investment Performance Standards (AICPA, Technical Practice Aids,AUDsec.14,450) AAG-AIR vi (cid:2) SSAENo.17,ReportingonCompiledProspectiveFinancialState- mentsWhenthePractitioner'sIndependenceIsImpaired (AICPA, (cid:2) ProfessionalStandards,ATsec.301par..23) InterpretationNo.1,"ReportingUnderSection112oftheFederal Deposit Insurance Corporation Improvement Act," of AT section 501,AnExaminationofanEntity'sInternalControlOverFinan- cialReportingThatIsIntegratedWithandAuditofItsFinancial Statements (AICPA, Professional Standards, AT sec. 9501 par. (cid:2) .01–.07) PublicCompanyAccountingOversightBoard(PCAOB)Auditing Standard No. 16, Communications with Audit Committees, and AmendmentstoOtherPCAOBStandards(AICPA,PCAOBStan- dardsandRelatedRules,AuditingStandards) Usersofthisguideshouldconsiderguidanceissuedsubsequenttothoselisted previouslytodeterminetheireffectonentitiescoveredbythisguide.Indeter- mining the applicability of recently issued guidance, its effective date should alsobeconsidered. The changes made to this edition of the guide are identified in the schedule ofchangesappendix.Thechangesdonotincludeallthosethatmightbecon- sidered necessary if the guide were subjected to a comprehensive review and revision. Defining Professional Responsibilities in AICPA Professional Standards AICPAprofessionalstandardsapplicabletoauditengagementsusethefollow- ingtwocategoriesofprofessionalrequirements,identifiedbyspecificterms,to describethedegreeofresponsibilitytheyimposeonauditors: (cid:2) Unconditional requirements. The auditor must comply with an unconditionalrequirementinallcasesinwhichsuchrequirement isrelevant.GAASusethewordmusttoindicateanunconditional (cid:2) requirement. Presumptively mandatory requirements. The auditor must com- ply with a presumptively mandatory requirement in all cases in which such a requirement is relevant except in rare circum- stances. GAAS use the word should to indicate a presumptively mandatoryrequirement. In rare circumstances, the auditor may judge it necessary to depart from a relevant presumptively mandatory requirement. In such circumstances, the auditor should perform alternative audit procedures to achieve the intent of thatrequirement.Theneedfortheauditortodepartfromarelevantpresump- tivelymandatoryrequirementisexpectedtoariseonlywhentherequirement is for a specific procedure to be performed and, in the specific circumstances oftheaudit,thatprocedurewouldbeineffectiveinachievingtheintentofthe requirement. Prior to SAS No. 122, Statements on Auditing Standards: Clarification and Recodification (AICPA, Professional Standards), the phrase is required to or requireswasusedtoexpressanunconditionalrequirementinGAAS(equiva- lenttomust).WiththeissuanceofSASNo.122,thephrasesisrequiredtoand AAG-AIR vii requiresdonotconveyarequirementorthedegreeofresponsibilityitimposes onauditors.Insteadthosetermsareusedtoexpressthatarequirementexists. Thetermsaretypicallyusedintheclarifiedauditingstandardstoindicatethat arequirementexistselsewhereinGAAS. AICPAprofessionalstandardsapplicabletoattestengagementsusethefollow- ingtwocategoriesofprofessionalrequirements,identifiedbyspecificterms,to describethedegreeofresponsibilitytheyimposeonanauditor: (cid:2) Unconditional requirements. The auditor is required to comply with an unconditional requirement in all cases in which the cir- cumstances exist to which the requirement applies. The terms mustandisrequiredisusedtoindicateanunconditionalrequire- ment. (cid:2) Presumptively mandatory requirements. The auditor must com- plywithapresumptivelymandatoryrequirementinallcasesin whichthecircumstancesexisttowhichtherequirementapplies; however,inrarecircumstancestheauditormaydepartfromthe requirementprovidedthattheauditordocumentshisorherjus- tification for the departure and how the alternative procedures performedinthecircumstancesweresufficienttoachievetheob- jectivesoftherequirement.Thewordshouldisusedtoindicatea presumptivelymandatoryrequirement. Itisimportanttonotethatupontheeffectivedateoftheclarifiedauditingstan- dards the terms describing professional requirements for audit engagements arerevised,andarethereforedifferentthanthoseusedforattestengagements. Seetheprecedingsectionforinformationondefiningprofessionalrequirements relatedtoauditingstandards. Applicability of U.S. GAAP and PCAOB Standards Audits ofthe financialstatementsofnonissuers (thoseentitiesnot subject to theSarbanes-OxleyActof2002ortherulesoftheSEC—thatis,privateenti- ties,generallyspeaking)areconductedinaccordancewithGAASasissuedby theASB,thedesignatedseniorcommitteeoftheAICPAwiththeauthorityto promulgate auditing standards for nonissuers. The ASB develops and issues standardsintheformofSASsthroughadueprocessthatincludesdeliberation inmeetingsopentothepublic,publicexposureofproposedSASs,andaformal vote. The SASs and their related interpretations are codified in the AICPA's Professional Standards. Rule 202, Compliance With Standards (AICPA, Pro- fessionalStandards,ETsec.202par..01),oftheAICPACodeofProfessional Conduct requires an AICPA member who performs an audit to comply with thestandardspromulgatedbytheASB.FailuretofollowGAAS,andanyother applicableauditingstandards,isaviolationofthatrule. Audits of the financial statements of issuers, as defined by the SEC (those entities subject to the Sarbanes-Oxley Act of 2002 or the rules of the SEC— thatis,publicentities,generallyspeaking),areconductedinaccordancewith standards established by the PCAOB, a private sector, nonprofit corporation createdbytheSarbanes-OxleyActof2002tooverseetheauditsofissuers.The SEC has oversight authority over the PCAOB, including the approval of its rules,standards,andbudget. AAG-AIR viii References to Professional Standards IncitingGAASanditsrelatedinterpretations,referencesusesectionnumbers withinthecodificationofcurrentlyeffectiveSASs,nottheoriginalstatement number, as appropriate. In those sections of the guides that refer to specific auditingstandardsofthePCAOB,referencesaremadetotheAICPA'sPCAOB StandardsandRelatedRulespublication. AICPA.org Website The AICPA encourages you to visit the website at www.aicpa.org, and the Financial Reporting Center at www.aicpa.org/FRC. The Financial Reporting Center supports members in the execution of high-quality financial report- ing. Whether you are a financial statement preparer or a member in public practice, this center provides exclusive member-only resources for the entire financial reporting process, and provides timely and relevant news, guidance andexamplessupportingthefinancialreportingprocess,includingaccounting, preparingfinancialstatementsandperformingcompilation,review,audit,at- testorassuranceandadvisoryengagements.CertaincontentontheAICPA's websitesreferencedinthisguidemayberestrictedtoAICPAmembersonly. Select Recent Developments Significant to This Guide ASB’s Clarity Project Toaddressconcernsovertheclarity,length,andcomplexityofitsstandards, the ASB has made a significant effort to clarify the SASs. The ASB estab- lishedclaritydraftingconventionsandundertooktoredraftallofitsSASsin accordancewiththoseconventions,whichincludethefollowing: (cid:2) (cid:2) EstablishingobjectivesforeachclarifiedSAS Including a definitions section, where relevant, in each clarified (cid:2) SAS Separatingrequirementsfromapplicationandotherexplanatory (cid:2) material Numbering application and other explanatory material para- graphs using an A- prefix and presenting them in a separate (cid:2) sectionthatfollowstherequirementssection Using formatting techniques, such as bulleted lists, to enhance (cid:2) readability Including, when appropriate, special considerations relevant to auditsofsmaller,lesscomplexentitieswithinthetextoftheclar- (cid:2) ifiedSAS Including, when appropriate, special considerations relevant to audits of governmental entities within the text of the clarified SAS In addition, as the ASB redrafted standards for clarity, it also converged the standards with the International Standards on Auditing (ISA), issued by the InternationalAuditingandAssuranceStandardsBoard.Aspartofredrafting thestandards,theynowspecifymoreclearlytheobjectivesoftheauditorand AAG-AIR ix the requirements which the auditor has to comply with when conducting an auditinaccordancewithGAAS. WiththereleaseofSASNos.117–120andSASNos.122–127,theprojectisnear completion.Asofthedateofthisguide,theonlySASremainingtobeclarified is SAS No. 65, The Auditor's Consideration of the Internal Audit Function in anAuditofFinancialStatements(AICPA,ProfessionalStandards,AU-Csec. 610). Note that SAS No. 122 withdraws SAS No. 26, Association With Financial Statements,asamended,fromProfessionalStandards. SAS Nos. 122–127 are effective for audits of financial statements for periods ending on or after December 15, 2012. Refer to individual AU-C sections for specificeffectivedatelanguage. As part of the clarity project, current AU section numbers have been renum- bered based on equivalent ISAs. Guidance is located in "AU-C" section num- bersinsteadof"AU"sectionnumbers."AU-C"isatemporaryidentifiertoavoid confusionwithreferencestoexisting"AU"sections,whichwillremaininPro- fessionalStandardsthrough2013.The"AU-C"identifierwillrevertto"AU"in 2014, by which time substantially all engagement for which the extant stan- dardswerestilleffectiveareexpectedtobecompleted.NotethatAU-Csection numbers for clarified SASs with no equivalent ISAs have been assigned new numbers.TheASBbelievesthatthisrecodificationstructurewillaidfirmsand practitionersthatusebothISAsandGAAS. All auditing interpretations corresponding to a SAS have been considered in thedevelopmentofaclarifiedSASandincorporatedaccordinglyandhavebeen withdrawn by the ASB except for certain interpretations that the ASB has retainedandrevisedtoreflecttheissuanceofSASNo.122.Theeffectivedate oftherevisedinterpretationsalignswiththeeffectivedateofthecorresponding clarifiedSAS. International Financial Reporting Standards TheAICPAgoverningcouncilvotedinMay2008torecognizetheInternational Accounting Standards Board (IASB) as an accounting body for purposes of establishinginternationalfinancialaccountingandreportingprinciples.This amendment to appendix A of Rule 202 and Rule 203 of the AICPA's Code of Professional Conduct gives AICPA members the option to use International Financial Reporting Standards (IFRSs) as an alternative to U.S. GAAP. As a result, private entities in the U.S. can prepare their financial statements in accordance with U.S. GAAP as promulgated by FASB; a special purpose framework (such as an other comprehensive basis of accounting, or IFRSs, amongothers.However,domesticissuersarecurrentlyrequiredtofollowU.S. GAAP and the rules and regulations of the SEC. In contrast, foreign private issuers may present their financial statements in accordance with IFRSs as issued by the IASB without a reconciliation to U.S. GAAP, or in accordance withnon-IFRSshome-countryGAAPreconciledtoU.S.GAAPaspermittedby Form20-F. The growing acceptance of IFRSs as a basis for U.S. financial reporting may representafundamentalchangefortheU.S.accountingprofession.Acceptance ofasinglesetofhigh-qualityaccountingstandardsforworldwideusebypublic companies has been gaining momentum around the globe for the past few years.SeeappendixB,"InternationalFinancialReportingStandards,"ofthis AAG-AIR x guideforadiscerninglookatthestatusofconvergencewithIFRSintheUnited Statesandtheimportantissuesthataccountingprofessionalsneedtoconsider now. Private Company Financial Reporting Blue Ribbon Panel In 2012, the Financial Accounting Foundation established a new body to improve the process of setting accounting standards for private companies. The Private Company Council will decide on exceptions and modifications to U.S. GAAP for private companies and will advise FASB on treatment for private companies for the items on the FASB's agenda. The AICPA released anexposuredraftinNovember2012ofthefinancialreportingframeworkfor privatelyowned,for-profitsmallerenterprisesthatarenotrequiredtoproduce GAAP-basedfinancialstatements.Formoreinformationvisitwww.aicpa.org/ InterestAreas/FRC/AccountingFinancialReporting/PCFR/Pages/Financial- Reporting-Framework.aspx. Purpose and Applicability Introduction This guide has been written with the assumption that readers are proficient in accounting and auditing in general, but not necessarily familiar with the airline industry. Accordingly, the guide includes airline industry background andexplanatorymaterial. Aglossaryoftermsandseveralappendixeshavebeenincludedtoprovidethe reader with additional sources of information regarding the airline industry. Theappendixesareasfollows: (cid:2) AppendixA,"MappingandSummarizationofChanges—Clarified (cid:2) AuditingStandards" (cid:2) AppendixB Appendix C, "Schedule of Changes Made to the Text From the PreviousEdition" Limitations This guide does not discuss the application of all GAAP and all GAAS that are relevant to the preparation and audit of financial statements of airlines. Thisguideisdirectedprimarilytothoseaspectsofthepreparationandaudit of financial statements that are unique to airlines or those aspects that are consideredparticularlysignificanttothem. AAG-AIR