Fresh Start Accounting

Depreciation at Delta Air Lines: The "Fresh Start"

Plant, property and equipment is one of the largest asset categories for airline companies. Flight equipment and ground property and equipment are often more than half of the total assets of an airline, and depreciation of those assets is a major operating expense. Depreciation is an exercise in cost allocation undertaken to match the cost of assets with the revenues earned during the periods that assets are used. Depreciation is not an attempt to measure the current value of assets. The amount of depreciation estimated by an airline company for each operating period is based on the cost of assets, estimates of asset lives, and assumptions about residual values at the end of the asset lives. These estimates and assumptions have changed through the years for almost all airlines. Delta Air Lines is no exception.

Delta Air Lines filed for reorganization under Chapter 11 of the U.S. Bankruptcy Code in September 2005 and emerged from bankruptcy as a new company one year ahead of schedule on April 30, 2007. (Bankruptcy is a process providing protection of the court during a period when a company tries to restructure itself and its operations to return to viability.) Upon emergence from bankruptcy Delta adopted “fresh start" accounting in accordance with American Institute of Certified Public Accountants’ Statement of Position 90-7, "Financial Reporting by Entities in Reorganization under the Bankruptcy Code" (SOP 90-7).

Fresh start accounting requires resetting the historic net book value of assets and liabilities to fair value and becoming a new entity for financial reporting purposes. Delta's consolidated financial statements after May 1, 2007, are not comparable to consolidated financial statements before that date. On May 1, 2007, Delta adopted policies regarding estimated lives and residual values for aircraft, but it was far from the first time it had changed its estimates. Depreciation practices had been changed...