Financial Notes

Accounting Policies 

Southwest Airline’s financial accounting reports are prepared according to GAAP. Southwest’s preparation for their financial statements requires their management team to report estimates and assumptions that may affect their financial statements with footnotes accompanying them. Southwest utilizes historical data to prepare their statements. However, though past data is used, there are some conditions and factors that may change and affect their financial statements. Because of specific condition and factors that may affect the financial statement Southwest’s management team will assess current and past data to make proper judgement when reporting their current financial condition. As stated in this quote, “Critical accounting policies and estimates are defined as those that both (i) are most important to the portrayal of the Company’s financial condition and results and (ii) require management’s most subjective judgments.” (Southwest) 

 

Contingent Liability  

Southwest Airlines may face IRS assessment due to of how they operate. Due to air traffic liability, Southwest can only use past data, make assumptions and assess and predict what will be reported as stated in this quote, “The Company is from time to time subject to various legal proceedings and claims arising in the ordinary course of business, including, but not limited to, examinations by the Internal Revenue Service ("IRS"). The Company's management does not expect that the outcome of any of its currently ongoing legal proceedings or the outcome of any adjustments presented by the IRS, individually or collectively, will have a material adverse effect on the Company's financial condition, results of operations, or cash flow.” (Southwest) As state in that quote, this issue facing the IRS is not impact Southwest enough to place any contingencies on their balance sheet. 

Another contingent liability that is not reported may be lawsuits from missing properties such as baggage. Again, this contingency is not listed in their report because it does not impact Southwest enough to apply it in their balance sheet. 

 

Contractual Obligation and Liabilities (other specific notes) 

Currently Southwest Airlines has made a contractual agreement with Boeing to purchase new airplanes. Southwest has made an agreement with Boeing to purchase 40 737 Max airplanes in the next 4 years as stated in this quote, “In 2018, the Company exercised 40 737 MAX 8 options, which added 10 additional firm orders in each year 2019 through 2022.” (Southwest) In the balance sheet we can see that Southwest has deposited over $775 million in the purchase of these planes. Southwest’s current contractual obligation is $2.112 billion dollars and expected to increase to $5.013 billion. 

One liability that stands out is the air traffic liability. Seen in the balance sheet, air traffic liability makes up more than 50% of Southwest’s total liability. Air traffic liability is the purchase of an airlines ticket where its full transaction has not been completed. The loyalty program is used, or tickets are pre-purchased where Southwest will only refund these prepaid purchased on specific circumstances as stated in this quote, “The Company routinely carries a working capital deficit, in which its current liabilities exceed its current assets. This is common within the airline industry and is primarily due to the nature of the Air traffic liability account, which is related to advance ticket sales, unused funds available to Customers, and loyalty deferred revenue, which are performance obligations for future Customer flights, do not require future settlement in cash, and are mostly nonrefundable. (Southwest) 

 

Discussion 

It is important to understand how Southwest prepares their statement because we will be able to see a deficit and question how Southwest is still able to continue their operation. By reviewing their 10k report and statements we can understand that Southwest is preparing statements that are created from past data with assumptions which provides us information that their financial statements are not necessarily valid, concrete, with accurate data. Understanding how they developed their financial statements questions how they can place deposits for new airplanes without the actual profit that are made.