Airline impairment testing

How do airlines define cash-generating units?

A cash-generating unit is the smallest group of assets that generates cash inflows largely independent of other assets. A single aircraft rarely qualifies: it flies different routes each day, and a route's revenue depends on passengers connecting from other flights. So most network airlines treat the whole network as one unit, and groups with several airlines, such as a full-service carrier and a low-cost subsidiary, often treat each airline as a unit. Where routes and fleets can genuinely be separated, such as a distinct regional operation, smaller units may be identified. The choice matters: a larger unit lets profitable parts of the network support weaker ones. Ship owners, by contrast, usually test each vessel on its own; see vessel impairment. See cash-generating units.

What triggers an airline impairment test?

At each reporting date, the airline looks for indicators of impairment: groundings, whether of the whole fleet as in 2020 or of one aircraft type after a safety issue; decisions to retire a fleet early; sustained falls in demand, yields or margins; sharp rises in fuel costs that cannot be passed on; falling market values for aircraft; and a stock market value below the book value of net assets. Units with goodwill or indefinite-life slots are tested every year whether or not there are indicators. See IAS 36 impairment.

How is value in use built for an airline?

Value in use is the present value of the cash flows the unit is expected to generate in its current condition, usually from the latest five-year plan and a terminal value. The cash flows exclude growth from aircraft not yet delivered and from restructuring not yet committed, but include the maintenance needed to keep the fleet flying. Right-of-use aircraft are included in the carrying amount, and lease payments are left out of the cash flows, so the test is consistent; lease liabilities are generally not deducted. Cash flows in US dollars are estimated and discounted in dollars and translated at the spot rate. Fuel prices, yields, load factors and the discount rate are the key assumptions, and airlines disclose how much each would need to change to cause an impairment. The Impairment test model (Excel) sets out the calculation with your own figures. See value in use.

Airline impairment: testing a network

An airline's network cash-generating unit includes owned aircraft, right-of-use aircraft, acquired landing slots and goodwill from an earlier acquisition, carried at US$ 4,500 million in total. After a fall in demand, its value in use is 4,200 million, and fair value less costs of disposal is lower.

The 300 million impairment is allocated first to goodwill, which is written off in full, and the remaining 100 million to the other assets in proportion to their carrying amounts. No asset is reduced below the highest of its fair value less costs of disposal, its value in use and zero; if appraisals showed that an aircraft type's market value was above the allocated amount, the shortfall would be spread over the other assets instead.

How are retired and idle aircraft tested?

When an airline decides to retire a fleet type or park aircraft permanently, those aircraft stop contributing to the network's cash flows and are tested individually, usually at fair value less costs of disposal based on appraisals or part-out values. Aircraft the airline is committed to selling within a year are classified as held for sale under IFRS 5 and measured at the lower of carrying amount and fair value less costs to sell. Spare engines and parts for the retired fleet are written down too. Temporary parking during a downturn is different: the aircraft remain part of the network unit. See aircraft components and depreciation.

How are landing slots and goodwill tested?

Slots at congested airports are intangible assets when acquired, separately or in a business combination; slots an airline obtained free under historical use rules are not recognised. Acquired slots are often treated as having indefinite useful lives, because they can be kept as long as they are used, so they are not amortised and are tested annually, usually with the network unit. Goodwill is allocated to the units expected to benefit from the acquisition. See goodwill impairment.

Can an airline reverse an impairment?

Yes, except for goodwill. If the estimates used to measure recoverable amount improve, for example as traffic recovers after a downturn, impairments of aircraft, right-of-use assets and slots are reversed, up to the carrying amount each asset would have had after depreciation if no impairment had been recognised. See impairment reversals.

How does US GAAP differ?

Under ASC 360, long-lived assets are grouped at the lowest level for which identifiable cash flows are largely independent, which US airlines often take to be the fleet type. A group is impaired only if its undiscounted cash flows are below its carrying amount, and then it is written down to fair value; reversals are not allowed. Goodwill and indefinite-lived intangibles are tested separately under ASC 350. See IAS 36 vs US GAAP and airline accounting.

This guide is general information. It is not tax or legal advice for your situation.