Case- Depreciation at Delta Air Lines: The "Fresh Start".
Questions-
Q1 and OC1: What are some of the possible reasons why Delta may have extended the lives of flight equipment and changed residual values four times since 1986? In answering this question, consider it from Delta's perspective but also give your thoughts of this strategy/business decision from a macro level of analysis - how other organizations/industries may apply this strategy.
Q2: A) Assume Delta purchased the 6 aircraft in the table below. Complete the table with the assumed residual value of each aircraft and the first-year depreciation for each aircraft (fill-in the cells containing question mark).
B) Looking at your completed table, what pattern do you notice with the useful lives and residual % relative to the other similar aircraft, for each of the 3 sets of aircraft? In other words, what is the effect of the change in estimates?
|
Year
|
Aircraft number
|
Price ($ millions)
|
Useful life (see Exhibit 1)
|
Residual as a % of cost
|
Residual Value ($millions)
|
First Year Depreciation ($ millions)
|
|
MD88
|
|
|
|
1985
|
D2851
|
$33
|
?
|
?
|
?
|
?
|
|
1988
|
D2882
|
$39
|
?
|
?
|
?
|
?
|
|
B-757-200
|
|
|
|
1992
|
D3921
|
$66
|
?
|
?
|
?
|
?
|
|
1993
|
D3932
|
$68
|
?
|
?
|
?
|
?
|
|
B-777-200ER
|
|
|
|
2006
|
D4061
|
$210
|
25
|
5
|
?
|
?
|
|
2007
|
D4972
|
$220
|
30
|
10
|
?
|
?
|
Q3: Assume each aircraft in question 2 is still in Delta's fleet in 2007. How would you estimate the net book value of aircraft before application of "fresh start" accounting in 2007? How would this compare to the "fresh start" value that Delta estimated in 2007 as described in the notes from consolidated financial statements included in the Form 10-K and the case?You should examine what Delta says was done, which you should read about in the case, you should consider what could have been done, and discuss what you would have done if you had managed this process. In answering (OC2),you may want to compare and contrast fair value versus historical cost for valuing assets, and when one method may be better than the other and vice versa.
Q4: (OC3) In your opinion, should the possible adoption of "fresh start" accounting be open to any corporation where management feels traditional historical cost-based accounting no longer allows them to present a fair picture of the assets, liabilities, and operating performance of that corporation?
Q5: (OC4) How does a company decide on a method of depreciation to use? How does the depreciation method affect the net income of the company? Describe an example of another company strategically using depreciation to positively affect its performance (could be the firm you work for, but must be a public company so we can all see its financial statements, etc)
Group 1 should do as Q5 and OC5
This is an extra question for Group 1 (because you have 5 students in group).
Groups 2 and 3 don't include in your essay but use as OC5 assigned to a student:
Q5 (OC5) Provide example of other company's use of Fresh Start revaluation and how it affected their books (for example increasing goodwill). Opine as to the positives and negatives of your example.