Airlines AICPA Audit and Accounting Guide

Notice to Readers

This AICPA Audit and Accounting Guide has been developed by the AICPA Airline Guide Task Force to assist management of reporting entities in their preparation of financial statements in conformity with U.S. generally accepted accounting principles (GAAP) and to assist auditors in auditing and reporting on such financial statements.

Accounting Guidance

The financial accounting and reporting guidance contained in this guide has been approved by the affirmative vote of at least two-thirds of the members of the Accounting Standards Executive Committee (AcSEC), which is the senior technical body of the AICPA authorized to speak for the AICPA in the areas of financial accounting and reporting.

The previous edition of this guide as of May 1, 2003, was cleared by the Financial Accounting Standards Board (FASB) and, therefore, was deemed to be within level b of the hierarchy of sources of GAAP that is described in FASB Statement No. 162, The Hierarchy of Generally Accepted Accounting Principles. Prior to issuing this edition of the guide, however, the AICPA and FASB agreed that FASB would no longer clear new editions of guides or new guides, and that new editions or new guides would be within level d of the hierarchy of sources of GAAP. Accordingly, this edition of the guide is within level d of the GAAP hierarchy. The 2003 edition of this guide is not superseded because it remains a source of level b GAAP.

The previous edition of this guide as of May 1, 2003, established accounting principles that are not promulgated elsewhere (referred to as incremental GAAP). Appendix A of this guide provides an analysis of those sections of the 2003 edition that have been tentatively identified by FASB staff to contain incremental GAAP. These sections have been incorporated into the FASB Accounting Standards Codification™ (codification). The codification is currently in the verification phase, during which FASB seeks user feedback on whether its content accurately reflects existing U.S. GAAP for nongovernmental entities. After addressing the issues raised during the constituent feedback process, FASB is expected to formally approve the codification as the single source of authoritative U.S. GAAP, other than guidance issued by the Securities and Exchange Commission (SEC). Until that time, the codification content is not authoritative and may change based on new standards and user feedback. The codification can be accessed at http://asc.fasb.org/home. For those who wish to refer to the complete 2003 guide, it will be available on the AICPA Web site at www.aicpa.org until the codification is finalized. However, please note that the 2003 edition does not include conforming changes for audit and accounting pronouncements that were issued after 2003.

Airlines that wish to conform to this guide should evaluate any changes in accounting under the provisions of FASB Statement No. 154, Accounting Changes and Error Corrections—a replacement of APB Opinion No. 20 and FASB Statement No. 3.

This guide does the following:

• Identifies certain requirements set forth in pronouncements in levels a, b, and c of the hierarchy of sources of GAAP. In these instances, entities are required to apply those requirements based on their standing in levels a, b, or c of the hierarchy rather than because of their inclusion in this guide.
• Describes AcSEC's understanding of prevalent or sole industry practice concerning certain issues. In addition, this guide may indicate that AcSEC expresses a preference for the prevalent or sole industry practice, or it may indicate that AcSEC expresses a preference for another practice that is not the prevalent or sole industry practice; alternatively, AcSEC may express no view on the matter.
• Identifies certain other, but not necessarily all, industry practices concerning certain accounting issues without expressing AcSEC's views on them.
• Provides guidance that has been supported by AcSEC on the accounting, reporting, or disclosure treatment of transactions or events that is not set forth in pronouncements in levels a, b, and c of the hierarchy of sources of GAAP.

Auditing Guidance

Auditing guidance included in an AICPA Audit and Accounting Guide is an interpretive publication pursuant to AU section 150, Generally Accepted Auditing Standards (AICPA, Professional Standards, vol. 1). Interpretive publications are recommendations on the application of Statements on Auditing Standards (SASs) in specific circumstances, including engagements for entities in specialized industries. An interpretive publication is issued under the authority of the Auditing Standards Board (ASB) after all ASB members have been provided an opportunity to consider and comment on whether the proposed interpretive publication is consistent with the SASs. The members of the ASB have found this guide to be consistent with existing SASs.

The auditor should be aware of and consider interpretive publications applicable to his or her audit. If an auditor does not apply the auditing guidance included in an applicable interpretive publication, the auditor should be prepared to explain how he or she complied with the SAS provisions addressed by such auditing guidance.

This AICPA Audit and Accounting Guide, which also contains attestation guidance, is an interpretive publication pursuant to AT section 50, SSAE Hierarchy (AICPA, Professional Standards, vol. 1). Interpretive publications include recommendations on the application of Statements on Standards for Attestation Engagements (SSAEs) in specific circumstances, including engagements for entities in specialized industries. Interpretive publications are issued under the authority of the AICPA ASB. The members of the ASB have found this guide to be consistent with the existing SSAEs.

A practitioner should be aware of and consider interpretive publications applicable to his or her attestation engagement. If the practitioner does not apply the guidance included in an applicable AICPA Audit and Accounting Guide, the practitioner should be prepared to explain how he or she complied with the SSAE provisions addressed by such guidance.

Defining Professional Requirements

AU section 120, Defining Professional Requirements in Statements on Auditing Standards, and AT section 20, Defining Professional Requirements in Statements on Standards for Attestation Engagements (AICPA, Professional Standards, vol. 1), which were issued in December 2005, set forth the meaning of certain terms used in SASs and SSAEs, respectively, issued by the ASB in describing the professional requirements imposed on auditors and practitioners. The specific terms used to define professional requirements in these sections are not intended to apply to interpretive publications issued under the authority of the ASB because interpretive publications are not auditing or attestation standards. It is the ASB's intention to make conforming changes to the interpretive publications over the next several years to remove any language that would imply a professional requirement where none exists.

AU section 120 and AT section 20, which were effective upon issuance, define the terminology that the ASB will use going forward to describe the degree of responsibility that the requirements impose on the auditor, practitioner, or accountant in engagements performed for nonissuers. SASs and SSAEs will use the words must or is required to indicate an unconditional requirement, with which the auditor, practitioner, or accountant is required to comply. SASs and SSAEs will use the word should to indicate a presumptively mandatory requirement. The auditor, practitioner, or accountant is required to comply with a presumptively mandatory requirement in all cases in which the circumstances exist to which the presumptively mandatory requirement applies; however, in rare circumstances, the auditor, practitioner, or accountant may depart from a presumptively mandatory requirement, provided he or she documents the justification for the departure and how the alternative procedures performed in the circumstances were sufficient to achieve the objectives of the presumptively mandatory requirement. If a SAS or SSAE provides that a procedure or action is one that the auditor, practitioner, and accountant "should consider," the consideration of the procedure or action is presumptively required, whereas carrying out the procedure or action is not.

The use of terminology in this guide is consistent with the requirements of AU section 120 and AT section 20.

Recognition

Accounting Standards Executive Committee (2007-2008)

Airline Guide Task Force

The Accounting Standards Executive Committee (AcSEC), the Airline Guide Task Force, and the AICPA thank the following former AcSEC members for their contribution to this project: John Althoff, Mark Bielstein, Val Bitton, Pascal Desroches, Karin French, Carl Kampel, Peter Knutson, James Kroeker, Robert Laux, Steve Lilien, Andrew Mintzer, Holly Nelson, Coleman Ross, Enrique M. Tejerina, Robert Uhl, Dan L. Weaver, and Brent Woodford.

The Airline Guide Task Force and the AICPA also gratefully acknowledge the following individuals for their assistance in development of this guide: Karen M. Bowling, Lori S. Hickox, Craig Isakson, Marney MacKenna, Darrell L.McKown, and John J. Mutrie, Jr.

AICPA Staff

Guidance Considered in This Guide

Relevant guidance contained in official pronouncements issued through October 1, 2008 has been considered in this guide. This includes relevant guidance issued up to and including the following:

• FASB Statement of Financial Accounting Standards No. 163, Accounting for Financial Guarantee Insurance Contracts—an interpretation of FASB Statement No. 60
• Revised FASB Statements issued through May 1, 2008, including FASB Statement No. 141(R), Business Combinations
• FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109
• FASB Technical Bulletin 01-1, Effective Date for Certain Financial Institutions of Certain Provisions of Statement 140 Related to the Isolation of Transferred Financial Assets
• FASB Staff Positions issued through October 1, 2008
• FASB Emerging Issues Task Force (EITF) consensus ratified by the FASB through October 1, 2008
• Statement of Position (SOP) 07-1, Clarification of the Scope of the Audit and Accounting Guide Investment Companies and Accounting by Parent Companies and Equity Method Investors for Investments in Investment Companies (AICPA, Technical Practice Aids, ACC sec. 10,930)
• Practice Bulletin No. 15, Accounting by the Issuer of Surplus Notes (AICPA, Technical Practice Aids, PB sec. 12,150)
• SAS No. 114, The Auditor's Communication With Those Charged With Governance (AICPA, Professional Standards, vol. 1, AU sec. 380)
• Auditing Interpretation No. 3, "Financial Statements Audited in AccordanceWith International Standards on Auditing" of AU section 534, Reporting on Financial Statements Prepared for Use in Other Countries (AICPA, Professional Standards, vol. 1, AU sec. 9534 par. .09-.11)
• SOP 07-2, Attestation Engagements That Address Specified Compliance Control Objectives and Related Controls at Entities That Provide Services to Investment Companies, Investment Advisers, or Other Service Providers (AICPA, Technical Practice Aids, AUD sec. 14,430)
• SSAE No. 14, SSAE Hierarchy (AICPA, Professional Standards, vol. 1, AT sec. 50)
• Attestation Interpretation No. 6, "Reporting on Attestation Engagements Performed in Accordance With Government Auditing Standards" of AT section 101, Attest Engagements (AICPA, Professional Standards, vol. 1, AT sec. 9101 par. .56-.58)
• PCAOB Auditing Standard No. 5, An Audit of Internal Control Over Financial Reporting That Is Integrated with An Audit of Financial Statements (AICPA, PCAOB Standards and Related Rules, Rules of the Board, "Standards")

Users of this guide should consider pronouncements issued subsequent to those listed above to determine their effect on entities covered by this guide. In determining the applicability of a pronouncement, its effective date should also be considered.

Auditing Guidance Included in This Guide

Risk Assessment Standards

In March 2006, the ASB issued SAS Nos. 104-111 (the risk assessment standards). Collectively, the risk assessment standards establish standards and provide guidance concerning the auditor's assessment of the risks of material misstatement (whether caused by fraud or error) in a nonissuer financial statement audit; design and performance of tailored audit procedures to address assessed risks; audit risk and materiality; planning and supervision; and audit evidence. The most significant changes to existing practice that the auditor will be required to perform are as follows:

• Obtain a more in-depth understanding of the audited entity and its environment, including its internal control;
• Perform a more rigorous assessment of the risks of where and how the financial statements could be materially misstated (defaulting to a maximum control risk is not acceptable);
• Provide a linkage between the auditor's assessed risks and the nature, timing, and extent of audit procedures performed in response to those risks.

The statements are effective for audits of financial statements for periods beginning on or after December 15, 2006. This guide reflects the new risk assessment standards.

For additional guidance on the risk assessment standards, please refer to the AICPA Audit Guide Assessing and Responding to Risk in a Financial Statement Audit (product no. 012456), and the AICPA Audit Risk Alert Understanding the New Auditing Standards Related to Risk Assessment (product no. 022526).

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