Behavioral Implications of Airline Depreciation Accounting Policy Choices

Discussion Questions

1. Assume that at least some rewards for the management team (and, hence, also other employees) are based on performance measured in terms of accounting income and return on net assets. Also assume that all of these airlines are growing; that is, they are adding to their fleet of aircraft.
   1. What are the behavioral implications of each of the three depreciation-related accounting policies:
      1. Depreciation patters (i.e., straight-line vs. accelerated)
      2. Estimated useful lives
      3. Residual values
   2. Consider, at a minimum, the effects of each of these choices on decisions regarding:
      1. Replacements of aircraft in service
      2. Pricing, assuming that prices are at least somewhat dependent on costs
      3. Evaluation of routes or lines of business
      4. Evaluation of managers, assuming that negotiated budgets provide the primary standards of performance
   3. Assume that in a particular U.S. airline company there is a conflict between the benefits of conservatism vs. liberalism in depreciation accounting. That is, for this company conservatism in depreciation accounting is greatly preferred for financial reporting purposes (for whatever reason) but for internal purposes the company would be better off if the policies were more liberal, or vice versa. Would you recommend to the managers of this company that they adopt a third set of books? That is, should they maintain one set of books for financial accounting purposes, another set for tax purposes, and a third set for the purposes of running the business?
   4. If the managers of a particular airline do not want to maintain a third set of books, should they tend to be conservative or liberal in their aircraft depreciation accounting?
   5. International Financial Reporting Standards (IFRS) are less prescriptive than current U.S. GAAP, and the interpretive guidance that is provided is more limited. More judgement is needed by managers in firms following IFRS, so this question will be come more relevant after U.S. firms shift over to IFRS: Should judgments about financial reporting policies be affected significantly by concerns about the possible effects of behaviors of employees of the firm, or should they be chosen solely based on judgments about what is perceived to provide the best financial reporting disclosures?