Core Summary

  • The Financial Accounting Standards Board (FASB) decided on Wednesday (March 25) not to consider modifying the current accounting guidance that airlines use to account for settlement payments from aircraft manufacturers. Such payments are intended to compensate for lost revenue and/or increased costs resulting from aircraft groundings due to equipment failures.
  • According to meeting materials, current generally accepted accounting principles (GAAP) generally require companies to treat such payments from suppliers as reductions to the cost basis of purchased goods or services, unless specific conditions are met.
  • However, some stakeholders believe that because airlines suffer "significant losses" in such events, the current approach fails to accurately reflect the underlying economic substance of the transaction. They suggested that the FASB consider various options to improve the guidance, one of which was to require recognition of settlement payments in "current earnings."

In-Depth Analysis

The airline-related project was one of several topics that the accounting standard-setter decided this week not to add to its technical agenda or pursue further research. On Wednesday, the board also rejected a request to review and clarify rules related to personal financial statements, a project linked to President Donald Trump's civil fraud case.

The FASB's decision not to move forward with potential changes to Cost of Sales and Services—Accounting for Consideration Received from a Supplier (Subtopic 705-20) came after FASB staff did not recommend that the board add a project. During the meeting, a staff member noted that aircraft groundings and other events leading to such settlements are relatively rare and that the issue was raised only within the airline industry, adding that changes could have unintended consequences.

Board members expressed differing views on the matter.

Voting in favor of adding a project, board member Joyce T. Joseph said she was concerned that current guidance delays recognition of payments over the depreciable life of the asset (which could be up to 20 years), thereby providing investors with an unclear picture of equipment value.

"When supplier payments represent compensation for losses, treating them as cost reductions and burying the impact and depreciation expense over many years, rather than accounting for them as revenue or income, could, in my view, distort performance," Joseph said. "I believe that reducing the cost of an asset does not provide investors with informative financial statements."

Joseph said that if a project were added, it should be strictly limited to the airline industry, but she also cautioned that other industries might be interested in similar treatment.

In contrast, board member Susan M. Cosper voted against adding the project to the agenda. In explaining her decision, she noted that there was no "strong call" to address the issue. She also stated that the issue had not been shown to be "pervasive," which is a key element needed to add a project to the board's agenda. Cosper also pushed back on the notion that investors might be kept in the dark.

"In terms of the airline industry, the staff noted that there aren't many instances where we've had to apply this guidance... but what strikes me is that when these events occur, they are disclosed. We haven't heard that investors are truly lacking information in this area," Cosper said.