writedown of fleets to fair value??

[shon7]

In UALs restructuring they state that the "fleets were written down to fair value." I assume this is accelerated depreciation?

How does this help the company in the long run? Won't the residual value of the fleet be less?

 

[Publishers]

Write Down

Write downs are sort of instant depreciation when you can prove or reasonably show that the value is less than the depreciated book value.

This happens more where someone is taking straight line depreciation rather than some form of accelerated method. Massive changes in the market can suddenly make your book value much higher than the real value.

It does not help in the company one way or the other. Where it would show up is when as example the market changes and there is demand for the asset. You sell and recapture more in "profit" than you would have. Profit here is defined as the difference between book and sales price but not necessarily real profits.

It does cause the book or residual value of the fleet to be less.

 

[T-Bags]

"It does not help in the company one way or the other."

WRONG.

Whats important for UAL is how it proforms AFTER BK. Lower assets at the end of restructuring also allow the company to shed more debt. Here's how it will work. Lets assume depreciation is the ONLY cost for simplicity sake.

Before BK

Revenue $100
Cost (depre) $110
result is a loss of $10

Now the company takes a few HUGE depreciation hits in BK. Exiting BK that asset now has a book value of 900 and an expected life of 10 years, or 90 per year on a straight line depreciation schedule

Revenue $100
Cost (depre) $90
result is $10 PROFIT

Nothing changed but the books..... (and debt)

 

[cargoflyr69]

I always find it interesting how accountants can find ways to cook the books, legal and illegal Hope it all works out for UAL!

 

[Publishers]

not quite

First of all -- lets start with the fact that writing down the book value does nothing at all to debt. It is a reflection of tax and real depreciation.

Second, you are not changing depreciation schedule for the most part, just the amount remaining to zero.

It will only help when the aircraft gets to zero. It can pump you up post BK by having a low book and then selling the asset. Let's say you have a 727 on the books for $2,0 million remaining. During BK you write it to zero. The day you come out, you sell it for $1.0. You have a non recurring profit of $1 million

 

[T-Bags]

Pub,
I suggest you read over the rules of BK. UAL is supposed to re-evaluate asset values an set them to market rates. THEN they establish a new depreciation schedule for those assets over the remaining service life. This means LOWER depreciation expences on future financials (post BK). Considering UAL charged off approx $1 billion a year in depreciation, a 20% reduction in asset values (assuming an equivilent service life) would result in a $200 MILLION annual reduction in expenses. While debt would remain the same in a non-BK situation, the lower assest values will result in more unsecured debt being written off prior to emergence.