BAO2203: Corporate Accounting - Jet-Sky Airways Ltd and Sky-Ways Airlines Ltd Case Study - Accounting Assignment Help

Assignment Task:

Jet-Sky Airways Ltd and Sky-Ways Airlines Ltd:

This comparative study of accounting policies adopted by two international airlines for the depreciation of aircraft, spares and spare engines provides an insight into the differences in accounting policy that may emerge, even when accounting practice in the jurisdictions involved is regulated.

• Non-current assets
• Depreciation
• Depreciable amount 
• Useful 
• Comparability of results 
• Financial statement analysis

Jet-Sky Airways Ltd (Jet-Sky) and Skyways Airlines Limited (Skyways) both operate in the international aviation industry. Jet-Sky is Australia’s largest airline, having been formed in 1920 and the Sky-Ways was formed in 1972, although its origins date back to 1947, and is based in Asia-Pacific region.

Both companies operate a diverse airline fleet. Aircraft, spares and spare engines collectively constitute a major asset of such corporations as is demonstrated by reference to the 2019 Statements of financial position of these two companies. In the case of Jet-Sky, this non-current asset, shown as ‘Property plant and equipment’ at a stated written-down value (i.e., carrying amount) of $9 753.7 million, represented 55.5 per cent of the total group assets of $17 574.2 as at 30 June 2019. For Skyways, this fixed asset category disclosed as ‘Aircraft, spares and spare engines’ at a written-down value of $12 464.5 million, constituted 62.4 per cent of total group assets as at 31 March 2019 of $19 990 million. Accordingly, the accounting policies adopted in depreciating such assets over their useful lives assume importance in assessing the financial performance and position of airline operator.

In the case of Jet-Sky, the ‘Depreciation and amortisation’ policy for aircraft, spares and spare engines were disclosed in Note 1 (n) of the ‘Notes to the financial statements’ for the year ending 30 June 2019. The relevant portion of this note is reproduced as follows:

Depreciation and amortisation:

Depreciation and amortisation are provided on a straight-line basis on all items of property, plant and equipment except for freehold and leasehold land. The depreciation and amortisation rates of owned assets are calculated so as to allocate the costs or valuation of an asset, less any estimated residual value, over the asset’s estimated useful life to the Jet-Sky Group. Assets are depreciated or amortised from the date of acquisition or, in respect of internally constructed assets, from the time an asset is completed and held ready for use. The costs of improvements to assets are amortised over the remaining useful life of the asset or the estimated life of the improvement, whichever is the shorter. Assets under finance lease are amortised over the term of the relevant lease or, where it is likely the Jet-Sky Group will obtain ownership of the asset, the life of the asset.

The principal asset depreciation and amortisation periods and estimated residual value percentages (for aircraft, spares and spare engines) are:

These rates are in line with those for the prior year, with the exception of the residual value assumption on wide-bodied aircraft (Boeing 747 and 767 and Airbus A330 aircraft) which was revised from 2 per cent to 20 per cent.

Depreciation and amortisation rates and residual values are reviewed annually and reassessed having regard to commercial and technological developments and the estimated useful life of assets to the Jet-Sky Group. 

On the other hand, Sky-Ways reported its policy relating to the ‘Depreciation of fixed assets’ at Note 2 (g), entitled ‘Accounting policies’. The portion of this note pertaining to aircraft, spares and spare engines is reproduced hereunder:

Depreciation of fixed assets:

Fixed assets are depreciated on a straight-line basis at rates which are calculated to write-down their cost to their estimated residual values at the end of their operational lives. Operational lives and residual values are reviewed annually in the light of experience and changing circumstances.
Fully depreciated assets are retained in the financial statements until they are no longer in use. No depreciation is charged after assets are depreciated to their residual values.

Aircraft fleet:
The Group depreciates its new passenger aircraft, spares and spare engines over 15 years to 10 per cent residual values.
For used passenger aircraft, the Group depreciates them over the remaining life (15 years less age of aircraft) to 10 per cent residual values.
The Group depreciates its new freighter aircraft over 15 years to 20 per cent residual values. For used freighter aircraft, the Group depreciates them over the remaining life (15 years less age of aircraft) to 20 per cent residual value.
Jet-Sky provided the following more specific information on aircraft, spares and spare engines in Note12, ‘Property, plant and equipment’, to the financial statements for the year ending 30 June 2019. This information has been extracted from the group accounts:

For Sky-Ways, Note 17, entitled ‘fixed asset’, stated similar information with respect to aircraft spares and spare engines as at 31 March 2019. The relevant information extracted from the group accounts is set out as follows:

Additional information on the operations of the two companies:

Jet-Sky has larger domestic operation than international flights. Hence it has more short-haul flight passengers. On the other hand, Sky-Ways has very small domestic operations but larger international operations compared to Jet-Sky. It carried almost 1.5 times international passengers than that of Jet-Sky in the 2018/2019 financial years. Hence, Sky-Ways is concentrated on a long-haul flight. Arguably, there are higher costs and wear and tear on aircraft from short-haul operations compared to long-haul operations with more takeoffs and landings relative to passengers carried, plus higher tarmac and terminal fees, and passenger ‘handling ‘costs. Further, the company websites show that the average fleet age* of Sky-Ways airlines was 5 years while the Jet-Sky aircraft was 10 years in the 2019 financial year.

Required:

1. Compare and contrast the depreciation accounting policies of Jet-Sky and Sky-Ways for the year ended 30 June 2019 and 31 March 2019 respectively. Comment on the comparability of the results reported. In your response, acknowledge any key differences in the operations of these two competing airlines.

2. Using the financial information provided, 
a. Compute an estimate of depreciation expense for the 2019 financial year for both Jet-Sky and Sky-Ways with respect to ‘aircraft and engines’ and ‘spare parts. 
b. Compute an estimate of depreciation expense for both the companies applying the useful life and residual value estimate of each for the other** to adjust the financial results under more comparable accounting policies.
c. Provide a comparative analysis of your findings. 

3. Review the 2019 annual report of two national aircraft companies (listed in the Australian Stock Exchange) and comment on its depreciation policy in estimating the useful lives of long-lived assets, such as aircraft used by major international commercial carriers based on the guidance provided under relevant accounting standards (AASB/IASB).

4. Based on your analysis of the case study, provide a discussion on the significance of depreciation policy in terms of its impact on the financial statements and financial ratios of companies under the same industry that adopt varying depreciation policies.

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