Chapter 9: Property, Plant, and Equipment
Winter in Hawaii!
In July 2014, WestJet Airlines Ltd. (WestJet) announced that it planned to purchase four Boeing 767-300ERW aircraft to continue and enhance its service from Alberta to Hawaii. These flights had previously been offered through an arrangement with another airline. This represented a significant investment by the company, as each Boeing 767 sells for approximately $191 million. The company had previously announced in March 2014 that it had placed an order for an additional five Bombardier Q400 NextGen aircraft. Aside from these orders, the company had also taken delivery of five other Q400 NextGen aircraft and two Boeing 737NG 800s in the first half of 2014. The company’s total fleet of aircraft in mid-2014 was 120 units, but the company indicated that it planned to expand the fleet to approximately 200 units by 2027.
Clearly, aircraft equipment is a significant asset for an airline. In WestJet’s case, the total carrying value of all its property and equipment at June 30, 2014 was approximately $2.7 billion. This represented approximately 66% of the company’s total asset base. The bulk of the company’s investment in equipment was comprised of aircraft ($1.9 billion) and deposits on aircraft ($0.5 billion). For any financial statement reader or decision maker, it is important to gain a clear understanding of the nature of this significant asset class in WestJet.
WestJet reports that their aircraft equipment is actually comprised of several components. These components include the aircraft itself—the engine, airframe, and landing gear components—and the live satellite television equipment. Each component is depreciated over different periods of time, ranging from five to twenty years. In addition to the aircraft equipment, the company depreciates other property and equipment, such spare engines, ground property, buildings, and leasehold improvements over periods ranging from three to forty years. It is evident that understanding the nature and identification of components is an important accounting function in a company like WestJet.
In the company’s accounting policy note, it is stated that the identification of components is based on management’s judgment of what constitutes a significant cost in relation to the total cost of an asset. As well, it states that management considers the patterns of consumption and useful lives of the assets when identifying reportable components. The accounting policy note further states that most overhaul expenditures are capitalized and depreciated.
As WestJet continues to expand its fleet into new types of aircraft, it will be important for management to consider their accounting policies carefully with respect to their property and equipment. With such a significant investment in non-current assets, accounting decisions regarding the identification of asset components can have a profound effect on reported income. A sound understanding of the criteria and principles behind capitalization of property, plant, and equipment assets is essential to understanding WestJet.
(Sources: Barterm, 2014; Westjet, 2014)
