Corporate Accounting Analysis: Air New Zealand - Depreciation Policies

This assignment delves into the corporate accounting practices of Air New Zealand, with a specific focus on depreciation policies as per AASB 116. The analysis breaks down the items recognized for depreciation, including airframes, engines, and various plant and equipment, highlighting the importance of separate recognition for significant components. It examines the straight-line method used by Air New Zealand and details the factors considered in determining the useful life of assets, such as wear and tear, technological obsolescence, and legal limits. The assignment also discusses the significance of depreciation policies to investors and management, emphasizing its impact on profit recognition, management decisions, and cash flow. The provided references include various accounting and financial management texts, offering a comprehensive understanding of the subject matter.

Corporate accounting

Question 3
In Our case we are going to look at Air New Zealand which is an airline listed in the Australian
stock exchange. According to AASB 116 which is comparable to IAS 16 items that have a
significant figure compared to the total cost of item of equity shall be recognized separately for
depreciation even if that item is under finance lease. Like in an aircraft the airframes and the
engine are recognized separately in the case of Air New Zealand the following items are
recognized for depreciation, Airframes, Engines Engine overhauls, Aircraft specific plant and
equipment (that is including simulators and spares, buildings and lastly non-aircraft specific
leasehold improvements, plant equipment furniture and vehicles.
If items useful life has almost the same character they can be grouped together for the purpose of
depreciation. Also, even if an item may not have a significant cost on the total cost it can be
charged for depreciation in a way that faithfully reflect its usage pattern or its useful life
The amount that is depreciated it shall be an allowable expense in the income statement unless it
is included in the carrying amount of another asset this is a case where the item is used to
produce other asset items so depreciation charges consist of the item production cost for
example in a manufacture of item the cost of depreciation can be included when conversion of
the item of stock is being done, in the case of Air new Zealand the items are recognized in the
income statement. (aasb, 2018)
The amount to be depreciated shall be allocated in a systematic basis over the useful life of the
item and the residual value reviewed at the end of each financial year. Depreciation shall be
recognized even if the fair value exceeds the carrying amount and as long as the residual amount
does not exceed the carrying amount.
Depreciation of an item starts when you start using it and it will end when an item is maybe
declared for disposal or for sale. So, as long as an item is held even if it is idle or is not in the
active, it will still be depreciated. But when applying the method of unit of production to
depreciate an item the depreciation can be zero if n production done on the item.

The following factors should be considered when settling the useful life of an item of stock;
A) What job the item will be used on
B) The expected wear and tear which in case of an aircraft it depends on the number of
landings and take offs others on the fully cycle of the aircraft also the maintenance
program on the item
C) At the rate that item becomes obsolete, if there is a high technology improvement
expected the item will be quickly depreciated to pave way for new technology
D) Legal or similar limits on an item like expiry date.
In case of building and land even if acquired together they should be recognized
separately. Land is usually classified to have unlimited life so it is not depreciated but in
case it I depreciated it should be in a manner to reflect the benefit got from it.
Depreciation method used it should reflect the pattern of future economic benefit of the
item. The method used should be reviewed every financial year end and in case there is a
significant change in the economic benefit of the item that should be factored in. there are
different method of depreciation used this includes straight line method, diminishing
method and unit of production method. In the case of Air New Zealand, they have
adopted the straight-line method. This is where a constant depreciation rate is used over
the useful life of the item (aasb, 2018)
In the case of Air New Zealand, the following item have been identified.
Item Useful life
Airframes 18 years
Engines 6-25 years
Engine overhauls Period to next overhaul
Aircraft specific plant and equipment
(including simulators and spares)
10-25 years
Buildings 50-100 years
Non-aircraft specific leasehold improvements,
plant, equipment, furniture and vehicles
2 – 10 years

Question 4
significance of depreciation policy
Important to the investors
in cases where it is not included there will be high profit recognized, so it will mislead the
investor that the company is more profitable than it should.
Importance to the management
In this the impact it has on the income depreciation reduces income and method of
depreciation is chosen by the management. Also, the item gets the management attention
to use it in a proper way. Also, it guides the management when to replace the item, the
impact the item has on the cashflow finally on the in the calculation of the taxable
income.

References
P-airnz.com. (2017). [online] Available at: https://p-airnz.com/cms/assets/PDFs/air-nz-
2017-financial-results.pdf [Accessed 6 Oct. 2018].
aasb (2018). [online] Aasb.gov.au. Available at:
https://www.aasb.gov.au/admin/file/content105/c9/AASB116_08-15_COMPoct15_01-
18.pdf [Accessed 6 Oct. 2018].
Brigham, E.F. and Gapenski, L.C., (1994). Financial management: theory and
practice (No. 658.159 B855 1994). Dryden Press.
Carlberg, C. (2007). Business Analysis with Microsoft Excel,(Adobe Reader). Pearson
Education.
Kimmel, P. D., Weygandt, J. J., & Kieso, D. E. (2010). Financial accounting: tools for
business decision making. John Wiley & Sons.
Weil, R. L., Schipper, K., & Francis, J. (2013). Financial accounting: an introduction to
concepts, methods and uses. Cengage Learning.
Zeff, S.A., (2010). The rise of “economic consequences”. In Insights from Accounting
History (pp. 45-59). Routledge.
Arrow, K.J., (2017). Optimal capital policy with irreversible investment. In Value,
capital and growth (pp. 1-20). Routledge.