Airlines - Financial reporting implications of COVID-19

Unprecedent times for airlines as they battle for survival. Regulators advise companies to

monitor current and potential effects of coronavirus on financial reporting and market

disclosures.

’Background and Regulator's statement

The airline industry is in freefall as travel bans cause a significant decline in passenger numbers and revenues in

rapid time. The airlines that combine air freight in addition to “revenue passenger miles” (or kilometers) within their

business model may have a slight benefit when supply chains and the market demands return. The airlines that

support the e-commerce growth sector during the crisis may create additional cargo revenue during the crisis. In

response to the crisis and social distancing, carriers around the world have cancelled flights and preparing for their

first zero-dollar sales days in aviation history and the associated delay in cash inflows.

Some of the responses being considered include temporarily requesting voluntary furloughs, laying off significant

numbers of staff, deferring aircraft/engine maintenance, deferring aircraft deliveries, ceasing capital expenditure,

grounding of high operating cost aircraft fleets, returning leased aircraft early, and cancelling indirect/direct

services/materials purchase orders to reduce operating costs as quickly as possible to preserve liquidity.

The International Air Transport Association’s (IATA) estimates US$252 billion in lost revenues now looks optimistic

and IATA has suggested up to US$200 billion of state aid in the form of cash injections and loan guarantees may

be required to save the industry from collapse. The past years of share buy-backs and focus on net debt are

relevant to many airlines as private equity and lenders focus their attention on this segment. Economic research

by IATA showed that in January 2020, most carriers had less than 3 months’ worth of cash to cover EBITDAR and

aircraft rental costs. These reserves will have already dwindled, and airline management teams are currently

exploring every avenue to delay payments, with many airlines in discussions with leasing companies (which are

estimated to own around 50% of the global fleet) and with other parties, such as air traffic management agencies,

to delay lease payments and route charges. The various options to return leased aircraft, return maintenance

inventory, defer new aircraft deliveries, and potentially cancel aircraft options are all important considerations. It is

becoming apparent that for many, that this will not be enough and significant state aid will be required to get many

through the revenue valley that the current global situation has created.

Large carriers are expected to have better access to financing. Airlines may also consider secured financing on

their aircraft fleets. However, the aircraft fleets may become de-valued or, at a minimum, challenged by current

and future lenders. The cycles (take-off and landing) and hours flown that drive regulatory maintenance compliance

will determine the extent that maintenance costs can be deferred.

Due to the widespread scale and reach of the pandemic, much will depend on the actions and support provided by

each individual government. Earlier in March, Civil Aviation Administration of China (CAAC) announced a range of

measures to support the sector in China from short term support and relief, to restarting services and to increased

infrastructure expenditure. In Europe, some governments have made available cash facilities and grants,

sometimes subject to the need for debt forgiveness from its creditors. In the United States, government grants and

aid totaling US$58 billion for the aviation industry have been approved.

Given the uncertainty around when this disruption will end, government support through short-term loans, grants

and tax relief is a welcome intervention and we are observing more and more of this as the crisis unfolds. However,

should the disruption be prolonged there will be significant knock-on effects through the broader aviation industry

including airport operators, the airframe and engine manufacturers and the entire aerospace supply chains and

even the leasing firms. More coordinated support could be required in the coming months applying greater pressure

to strained economies. What is clear however, is the significance of the aviation industry to the wider economy and

its strategic importance in playing a role in the global recovery. The continuation of airline consolidation through

mergers and the likely acquisitions (or equity positions in publicly traded airlines) will likely occur before and after

the crisis pandemic is stabilized.

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Airlines | 1

Financial reporting implications of COVID- 19

Turning to the financial reporting, regulators globally are looking for updates from listed companies as well as

providing relief in reporting deadlines in certain circumstances. The European Securities and Markets Authority

(“ESMA”) have emphasized that issuers should provide transparency on the actual and potential impacts of COVID-

19, to the extent possible based on both a qualitative and quantitative assessment on their business activities,

financial situation and economic performance in their 2019 year-end financial report if these have not yet been

finalized or otherwise in their interim financial reporting disclosures. However, due to the unprecedented nature of

the pandemic, and the corresponding disruption caused, the financial impact on airlines is difficult to determine.

What should companies consider?

Companies should assess the effects that the virus outbreak may have on required reporting. The following list

provides an overview of items that companies should consider.

Periodic disclosures. Airlines should consider their disclosure obligations regarding business risks related to the

impacts of coronavirus within the context of regulators laws. Disclosures should be specific to individual

circumstances, avoiding broad or generic language.

Disclosure within periodic filings to address these current – and evolving – events may be appropriate related the

risk factor and the management’s Discussion and Analysis of Financial Condition and Results of Operations

(liquidity, results of operations) and quantitative and qualitative disclosures about market risk.

Airlines should consider similar disclosure in the relevant sections of interim filings, including material changes in

financial condition. A company’s normal disclosure controls and procedures should be applied to the reporting of

this information.

While not exhaustive, the following table provides example disclosure considerations related to business risks.

Business risk

Disclosure considerations

Customer

demand

— Reduction in forward bookings and the associated material reduction in sales in

advance of carriage/deferred revenue

— Ticket refunds, cancellations, re-issues and change in ticketing terms

— Changes in passenger ticket and potentially loyalty breakage rates

— Changes in terms and conditions of loyalty programs and tier status

Financing

— Covenant ratios

— Term of existing and new financing facilities

— Defaults in rent contracts related with financial difficulties

— Cash flow maturities

— Unencumbered aircraft

— Going concern and viability disclosures

Operational

— Changes to Available Seat Kilometers

— Changes in fuel costs vs existing hedging arrangements

— Subcontractor obligations

— Commitments capital expenditures related with maintenance.

— Working capital including accounts receivables, accounts payable and inventory

People

— People retention (management and operational teams)

— Impact of market volatility on defined benefit pension balances

— Impact of remuneration schemes for 2020 Costs associated with restructuring /

redundancy programs

Accounting and financial reporting impacts. Airlines should consider how fleet groundings, travel bans,

economic uncertainties and market volatility will affect accounting conclusions. While not exhaustive, a list of

COVID-19 impacts and associated considerations are included below

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KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind

Airlines | 2

Financial reporting implications of COVID- 19

-Covid-19

Effects

Relevant

Accounts/

Disclosures

Accounting and Auditing

Standard Guidance

Financial Reporting Considerations

General Going concern

Subsequent events

Risks and

uncertainties

Disclosures

— ISA 570

— IS Alert 2020/03

— IAS 10

— FASB ASC Topic 205-40

— FASB ASC Topic 855,

— FASB ASC Topic 275

— AICPA Audit & Accounting

Guide – Airlines 2.132 - 2.138

— Hot Topic: Coronavirus –

Subsequent events, going

concern, and risks and

uncertainties disclosures dated

25 March 2020

— What are the relevant going

concern considerations? Dated

20 March 2020.

— Update of audit risk assessment and

associated Key Audit Matters (“KAMs”)

or Critical Audit Matters (“CAMs”)

— For 31 December y ear e nd reporting

companies, likely focus on going

concern, liquidity and subsequent

events in the financial statements

— Post 31 December year e nd reporting

companies, in addition to the above

considerations for 3 1 December year

end reporting companies, additional

issues covered in this document are

likely to be pervasive.

— Under I FRS Standards, management is

required to assess a company’s ability

to continue as a going concern. A

company is no longer a going concern if

management either in tends to liquidate

the entity or cease trading or h as no

realistic alternative but to do so. [IAS

1.25]

— Companies are required to disclose

material uncertainties related to events

or c onditions that may cast significant

doubt on their ability to continue as a

going concern. In addition, disclosure is

required when management concludes

that there are no material uncertainties

but reaching that conclusion involved

significant judgement (a ‘close call’).

[Insights 1.2.80]

— When management assesses the

company’s ability to continue as a going

concern, it will need to consider the

current economic uncertainty and

market volatility caused by the COVID-

19 outbreak, which has been further

exacerbated by a decline in oil prices.

— In assessing whether the going concern

assumption is appropriate,

management assesses all available

information about the future (which is at

least, but not limited to, 12 months from

the reporting date), considering the

possible outcomes of events and

changes in conditions, and the

realistically possible responses to such

events and conditions that are

available. [IAS 1.26]

— Consider me mber f irm consultation

criteria including those relating to going

concern and impairment of non-

financial assets.

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Airlines | 3

Financial reporting implications of COVID- 19

-Covid-19

Effects

Relevant

Accounts/

Disclosures

Accounting and Auditing

Standard Guidance

Financial Reporting Considerations

Grounding of

fleet ( reduction

in capacity)

— Aircraft and

components

(including ROU

assets)

— Other a ssets

within CGU to

which aircraft

relates to (e.g.

goodwill)

NB: Most airlines

have network level

CGUs. Prima facie

unlikely to change

unless permanent

shutdown of fleet

types or sub-

networks.

— IAS 36.12

— IFRS 13.16

— FASB ASC 360

— FASB ASC 820

— Hot topic: Coronavirus –

Increased risk of impairment of

goodwill and long-lived assets

dated 16 March 2020

— Have non-financial assets

become impaired?

Dated 20

March 2020.

— Insights to IFRS 3.10.120

— Insights into IFRS 3.10.230.20

— Insights to IFRS 2.4.480.10

— AICPA Audit & Accounting

Guide – Airlines 4.44- 4.65 and

7.26 - 7.29

Questions:

1. Is this event an indicator of PPE

impairment?

Entities need to consider the following:

a) Does this constitute a significant

adverse change in the extent or way

the aircraft (and its components) a re

being used?

b) Are the declines in profits arising from

the grounding of fleet short-lived or

extend into the foreseeable future?

c) Where the value of non-financial assets

is weighted towards terminal values, is

a longer f orecast period appropriate to

reflect a return to maintainable

earnings?

It has been noted that when economies

enter a difficult period, in our view it

may be necessary to determine the

terminal value in two stages to reflect

the impact of economic contraction and

a subsequent return to maintainable

earnings.

In the first stage, growth rates

(potentially on a year-by-year b asis) a re

applied to take the cash flows:

— to a level at which they can be

regarded as reflecting

maintainable earnings; and

— to the period in a mid-point of the

cycle - i.e. not at the peak or

trough of the cycle.

The second stage is an extrapolation of

those maintainable earnings until the

end of the asset's life. In accordance

with IAS 36, this growth rate should not

exceed the long-term average growth

rate appropriate to the asset or C GU,

unless a higher r ate can be justified.

[IAS 36.33(c)]

In addition to the above, it has been

noted that for older g eneration aircraft

fleets (e.g. Boeing 737-300/400, older

Embraer a nd McDonnell Douglas

aircraft, etc.), considering recent

events, there might be economic

incentives to retire these aircraft.

Apart from the grounding of fleet, other

decisions made by the airlines arising

from COVID-19 should also be

considered in determining impairment

indicators. Some examples of

indicators include:

— Concessions to passengers that

exceed normal business practice

— Significant deficit in market

capitalisation compared to total equity

triggered by significant decreases in

share prices

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Airlines | 4

Financial reporting implications of COVID- 19

-

Accounting and Auditing

Standard Guidance

Financial Reporting Considerations

Covid-19

Effects

Relevant

Accounts/

Disclosures

It is expected that in almost all instances,

there would be an indicator o f impairment.

2. How to determine the fair value less

costs to disposal (FVLCTD)

(recoverable amount) of the CGUs?

The recoverable amount of a CGU is the

higher o f the fair value less costs to sell,

and the value in use. Aircraft typically

form most assets within a CGU. Hence, in

a fair value less costs to sell model,

market values are typically used for

aircraft, pre-delivery payments and

aircraft lease ROU asset valuations within

the CGUs.

A fair value measurement may be

affected if there has been a significant

decrease in the volume or level of activity

for t hat item compared with normal

market activity for that item. Judgement

may be required in determining whether,

based on the evidence available, there

has been such a significant decrease. An

entity assesses the significance and

relevance of all facts and circumstances.

[IFRS 13.B37, B42]

Factors that might be considered include

the following:

— There are few recent transactions.

— There is a significant decline in primary

market activity for similar a ssets or

liabilities.

— Price quotations are not based on

current information.

— Little information is publicly available.

With the sharp decline in demand and

activity for a ircraft, aircraft valuers may have

difficulties in obtaining current information.

The absence of a market poses a challenge

in determining fair value of the aircraft.

Based on a study done by the aircraft valuer

Ascend, the market value of single and twin

aisle aircraft has decreased by 15% to 20%

and market lease rates have decreased by

20% to 25% in past crises (e.g. SARS Global

Financial Crisis). Given the recency and

ongoing impact of this crisis, the full extent of

impact to aircraft values and leases will be

difficult to determine and could well exceed

the declines observed in past crises. The fair

value of an asset (or liability) should reflect

market conditions at the measurement date.

This has become more challenging due to

the uncertainty of the economic impact of

COVID-19.

The uncertainties of COVID-19 effects into

FVLCTD w ill be a challenge.

As a result of the inherent uncertainties

arising from determining a fair value for

aircraft, VIU may be a more appropriate

method.

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Airlines | 5

Financial reporting implications of COVID- 19

-

Accounting and Auditing

Standard Guidance

Financial Reporting Considerations

Covid-19

Effects

Relevant

Accounts/

Disclosures

3. In conducting a value in use

impairment assessment, how should

assumptions used in determining

recoverable amount reflect C OVID-19

effects?

— Areas to look out for in clude the

following:

- Discount rate: When considering the

discount rate for a VIU computation,

the risk-free rate and beta should

typically consider a long-term metric.

The discount rate needs to reflect the

most recent updated information,

including those relating to risk free

rate, beta, cost of debt and equity. An

increased forecasting risk may also

be adjusted through the alpha.

- Cash flows: Adjustments for fleet

capacity and routes cancellation

- Growth rates: Near t erm growth

rates require revision whilst longer

term industry published growth rates

may still be appropriate

- Fuel costs: Recent decrease in fuel

prices need to be considered,

coupled with “locked-in” hedged fuel

prices.

- Leases: the impacts of IFRS 16 are

an added complication for mo st

airline impairment tests this year. It

will be important for lease costs to be

included into the terminal value

consistent with the size of fleet

required to achieve forecast revenues

even if an airline is making short-term

decisions that exit leases.

— Whilst the duration of COVID-19 is

unknown and fluid, IATA modelling

suggests that previous outbreaks have

peaked after 1 to 3 months and

demand levels recovered to pre-

outbreak levels in 6 to 7 months. This

may be relevant to the assessment,

although the situation continues to

evolve and COVID-19 appears to be

having a broader g lobal impact than

other o utbreaks. There are also

increasing indications of a global

recession similar t o 2008 and airlines

should also consider h ow demand

levels recovered following the 2008

crisis.

— Retrospective reviews of forecasting

accuracy will have minimal relevance

as the pandemic is unprecedented.

— Disclosures of information about

assumptions and estimation in respect

of a significant risk resulting in a

material adjustment to the carrying

value of an asset or liability.

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KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind

Airlines | 6

Financial reporting implications of COVID- 19

-

Covid-19

Effects

Relevant

Accounts/

Disclosures

Accounting and Auditing

Standard Guidance

Financial Reporting Considerations

Grounding of

fleet

(reduction in

capacity)

(continued)

— Depreciation of

aircraft and

components

— IATA Guidance – IAS 16

— IAS 16

— Insights to IFRS 3.2.160.30

Questions: Historically ‘time’ has been

used to reflect t he pattern of

consumption of future economic benefits.

1

. D

oes the mass grounding of aircraf

t

re

present a significant change in t

he

e

xpected pattern of consumptio

n?

2

. I

f s o, how would this be allocate

d

bet

ween depreciation due to age

of

a

ircraft v ersus usage of aircraft

?

— IAS 16.55: “Depreciation does not

cease when the asset becomes idle or

is retired from active use unless the

asset is fully depreciated. However,

under u sage methods of depreciation

the depreciation charge can be zero

while there is no production.”

— IAS 16.61: The depreciation method

applied to an asset shall be reviewed at

least at each financial year‑end and, if

there has been a significant change in

the expected pattern of consumption of

the future economic benefits embodied

in the asset, the method shall be

changed to reflect the changed pattern.

Such a change shall be accounted for

as a change in an accounting estimate

in accordance with IAS 8.

— On the above basis, airlines could,

through a prospective change in policy,

change the depreciation method to a

usage-based method. This may result

in reduced depreciation during the

period of grounding. Airlines should

also consider w hether t his affects the

residual values including consideration

of technological advances in aircraft

further int o the future.

— Prima facie, there could be an

argument for the depreciation rates for

usage based embedded maintenance

events (e.g. engine overhauls) to be

adjusted. However, careful analysis is

required. It is also worth noting that

time-based value decline will generally

continue from a market value/FV

perspective in addition to changes in

market value. While FV depreciation is

unrelated to normal accounting

depreciation, this may cause a larger

gap between NBV and VIU/FVLCTD

and ultimately be reflected through

impairments if impairment is recorded.

Further, parking of aircraft may cause

operators to incur additional expenses

related to inspections and maintenance

upon returning to service.

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Airlines | 7

Financial reporting implications of COVID- 19

-

Covid-19

Effects

Relevant

Accounts/

Disclosures

Accounting and Auditing

Standard Guidance

Financial Reporting Considerations

Grounding of

fleet

(reduction in

capacity)

(continued)

— Provision for

lease return

conditions

— IFRS 16

— FASB ASC 842

— IAS 37

— Insights to IFRS 5.1.295

3. Does the change in usage of leased

a

ircraft i mpact pr ovisi

ons?

— Airlines may be required to return lease

aircraft to the lessor a t contractually

agreed return conditions. Certain return

conditions which are dependent on

usage of the component at end of lease

may be determined based on the

amount of flight hours or flight cycles.

An airline should re-assess the basis of

estimates used to determine provisions

required for s uch components.

— Aircraft

maintenance

and overhaul

cost

—

IAS 16

—

IAS 37

4. What areas should be considered?

— Airlines with power-by-the-hour

arrangements with their maintenance

providers would need to consider any

minimum flying hours within the

contract and assess if the threshold

could be met and whether the airline

must compensate the maintenance

provider f or any shortfall. Any

compensation payments should be

accounted in accordance with

IAS 37.

— For maintenance event that are

capitalized and depreciated, airlines

would need to assess if the changes to

flight hours and flight cycles impact

their capitalisation or d epreciation rate.

Reassessment

of existing

operating

leases – e.g.

terms,

payment

schedules,

option to

purchase,

sub-lease etc.

— ROU Assets

— Lease liabilities

— IFRS 16

— FASB ASC 842

— Hot topics: Lease accounting

impacts of the COVID-19

outbreak.

— Has COVID-19 resulted in an

unavoidable liability or a loss-

making contract?

Question:

1. W

hat areas should be considere

d?

— Impairment indicators (see [Grounding

of fleet] above). The right of use asset

may be included within a CGU or may

have indicators of impairment at the

individual lease level, especially if there

is a short remaining lease term and

therefore less opportunity to utilize the

asset following a recovery.

— Lessee reassessments – Economic

events such as those arising from the

COVID-19 outbreak may trigger a

contingency in one or more lease

contracts (e.g. with respect to the lease

payments or the lease term – e.g. a

minimum payment clause or a

termination right).

— The expected residual value of an

underlying asset may be affected by the

economic circumstances, requiring

reassessment of the amount it is

probable that the lessee will owe under

a residual value guarantee.

— Fair value of the underlying asset

affects lease classification for lessors

and the accounting for new sale-

leaseback transactions. The fair value

of a ROU asset affects whether a nd

how much impairment is recognised on

a ROU asset. Fair values may be

affected by significant economic events

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Airlines | 8

Financial reporting implications of COVID- 19

-

such as the COVID-19 outbreak (see

[Grounding of fleet] above).

— Lessees that may have already

committed to a plan to cease use of an

ROU asset or would have done so

regardless of COVID-19, and were

intending to sublease the underlying

asset, may conclude they are not

practically able to sublease it, triggering

abandonment accounting (i.e.

accelerated amortization of the ROU

asset).

— Force Majeure and Termination for

Convenience clauses in aircraft and

engine leasing contracts and

rotable/exchange pool (APUs, Landing

Gear, etc.) agreements need to be

considered.

— If COVID-19 results in a liability, or a

contract becoming loss making, then

the company needs to recognize a

provision for o nerous contracts.

Covid-19

Effects

Relevant

Accounts/

Disclosures

Accounting and Auditing

Standard Guidance

Financial Reporting Considerations

Force Majeure

clause in

contracts

Capital

commitments

— IAS 16.74(c)

— IAS 38.122(e)

Question:

1. Do vendors (aircraft manufacturers,

banks, etc.) have the contractual

right to invoke the Force Majeure

clause in existing contracts?

— Perform inquiries with legal counsel

regarding the intended use of these

clauses (if they exist) p rior to financial

year-end. The inquiries should include

contract by contract

— To consider o btaining legal

confirmations from external (and/or)

internal counsels on the outcome of the

inquiries.

— KPMG does not provide legal advice

and hence understanding contracts

may require professional input from

qualified parties. We understand

broadly that force majeure clauses

(where applicable) may be invoked

when the following (distinct) criteria are

satisfied:

- the event must be beyond the

reasonable control of the affected

party;

- the affected party’s ability to perform

its obligations under t he contract

must have been prevented, impeded

or h indered by the event; and

- the affected party must have taken all

reasonable steps to seek to avoid or

mitigate the event or its

consequences.

— We understand that most force majeure

provisions contain “catch-all” language

in respect of events which are “outside

the reasonable control of the party

affected”. We also understand that it is

important to bear in mind that the

relevant force majeure event need not

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Airlines | 9

Financial reporting implications of COVID- 19

-

Covid-19

Effects

Relevant

Accounts/

Disclosures

Accounting and Auditing

Standard Guidance

Financial Reporting Considerations

be COVID-19 itself. It is the

consequences of COVID-19 and its

impact upon the ability of the affected

party to fulfil its contractual obligations

that will be relevant.

— This understanding is based on publicly

available information and not on

interpretation of any case law in any

jurisdiction. Entities should obtain

appropriate legal interpretation should

these clauses become relevant to

accounting judgements.

Material

Adverse

changes

clause in

contracts

Borrowings

—

IAS 1.69(d)

—

Insights to IFRS 3.1.40.110

Question:

1. H

ow does the Material Advers

e

C

hange c lause affect t he

c

lassification of borrowin

gs?

— If the clause is invoked prior to

financial year-end, the borrowings will

be classified as current.

— If the clause is invoked after financial

year-end, this should be treated as an

adjusting event and the related liability

should be classified as current at the

reporting date.

Careful analysis is required in determining

the trigger for t he clauses to be invoked (e.g.

upon expected breach or n otification from

the bank).

Undrawn facilities

—

IFRS 7.4

—

Insights to IFRS 7.10.10.20

Availability of undrawn facilities require

consideration.

Other c onsiderations include disclosures on

undrawn facilities in the financial statements.

Relief/

incentives

from

Government

and/or

airports – e.g.

Waiver of

landing

charges,

passenger

taxes,

government

guarantees on

debt or

contracts, etc.

Revenue

Other in come

Costs

Deferred income

Tax

Debt and other

guarantee

disclosures

The relevant accounting guidance

will depend on the form of the relief.

— IAS 20 if a government grant;

— IAS 12 if a change to the

corporate tax regime;

— IFRS 15 if a change to the

terms o f laws and regulations

normally c onsidered as part of

the customer contract, e.g.

some compensation schemes.

— Hot Topic: Coronavirus –

Income tax accounting impacts,

including interim estimates and

valuation allowances dated

20 March 2020.

— Are government grants

recognised in the right period

and appropriately measured?

Dated 20 March 2020

— Significant judgement may be required

to determine when and how to

recognise new government assistance

programs (e.g. gross versus net in the

income statement or capital treatment

for a sset related amounts).

— Each relief and incentive from

governments require careful analysis,

considering the nature and timing of the

benefit/incentive being

provided/granted. Consideration is also

required as to whether r elief is enacted

under leg islation and can be relied

upon.

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Airlines | 10

Financial reporting implications of COVID- 19

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Covid-19

Effects

Relevant

Accounts/

Disclosures

Accounting and Auditing

Standard Guidance

Financial Reporting Considerations

Increased

flexibility in

ticket t erms –

Waiver of

cancellation

charges

— Sales in

advance of

carriage

— Passenger

breakage

revenue

— IFRS 15 Contracts with

customers

— FASB ASC 606, Revenue from

Contracts with Customers

— AICPA Audit and Accounting

Guide, Revenue Recognition

Chapter 1 0 Airlines

— Are customer contracts still

enforceable? Dated 25 March

2020.

— Are revenue estimates up to

date? Dated 25 March 2020.

Key focus: Passenger breakage

estimates

— Revenue estimates need to be updated

to reflect the latest expectations, which

may impact the timing and amount of

revenue recognized.

— An airline should recognize the

expected breakage amount as revenue

in proportion to the pattern of rights

exercised by the passenger ( or flown

revenue), using historical trend

information.

— With the change in ticket terms, where

historical trend information has been

used in the past as a basis for

estimating future breakage rates, this

approach may need to be re-examined.

— Uncertainty about whether the rights

and obligations in customer contracts

remain enforceable may affect the

timing and amount of revenue to be

recognized.

Changes to

hedging

programmes

—

Derivatives

— IFRS 9.6.5.11(c)

— Hot Topic: Coronavirus –

Potential impacts on the

accounting for financial

instruments dated 23 March

2020

— FASB ASC 815

— KPMG Derivatives and Hedge

Accounting Handbook

Key focus: Fuel derivatives and FX

derivatives

— An airline should re-assess its

forecasted fuel consumption and

assess whether the volumes of fuel

hedged are still expected to be “highly

probable forecast transactions”. If the

usage is not expected to occur, any

amounts in the cash flow hedge reserve

will be recognized immediately in P&L.

— As a result of falling oil prices, airlines

might consider various means to limit

the economic losses suffered on

existing fuel derivatives. Some of these

measures include cancelling existing

derivative positions or entering into new

derivatives positions. Entities need to

understand the rationale and objective

of these new measures in assessing

any resultant accounting treatment.

— Similarly, hedged foreign currency

transactions including fuel purchases,

aircraft pre-delivery payments, lease

liability, end of lease overhaul

obligations, capital commitments and

revenue will also need to be

reassessed as they may no longer be

probable or may be delayed.

— Margin requirements on derivative

positions impacting cash flows, liquidity

disclosures.

Valuation of derivatives, especially options,

may become more difficult due to increases

in volatility causing a greater r ange of

possible valuation outcomes at the reporting

date under d ifferent valuation techniques.

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Airlines | 11

Financial reporting implications of COVID- 19

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Covid-19

Effects

Relevant

Accounts/

Disclosures

Accounting and Auditing

Standard Guidance

Financial Reporting Considerations

Impact of slot

requirements

Intangible assets

— IAS 36

— FASB ASC 350

— AICPA Audit & Accounting

Guide – Airlines 6.16 - 6.21 and

6.42 - 6.55

Question:

Is non-fulfilment of slot requirements

an indicator of PPE impairment?

— Whilst regulators have alleviated slot

usage requirements in the short term,

as these assets are typically non-

amortizing intangible assets, careful

analysis is required.

Extension of

expiry per iods

of loyalty

program

— Deferred

revenue

— Breakage

— IFRS 15 Revenue from

contracts with customers

Key focus: Loyalty Program fair value

and breakage estimates

— Extensions to the expiration date of

loyalty points, tier status or the licensing

period should be evaluated for a

contract modification and could require

a cumulative-catch up adjustment to

adjust revenue previously recognized.

Change i n

redemption

behavior in

loyalty

program

—

Fair value

— Deferred

revenue

—

Breakage

— IFRS 15

— FASB ASC 606,

— AICPA Audit and Accounting

Guide, Revenue Recognition

Chapter 1 0 Airlines

Key focus: Loyalty Program fair value

and breakage estimates

— Reduced availability of flight rewards in

the short-term may affect the fair value

if a lower p roportion of points are

expected to be redeemed for f lights.

— Any significant increases in redemption

activity that may require a retrospective

adjustment of balance breakage

estimates to be monitored.

— Significant changes to forecasted

loyalty program revenue may impact

both the estimate of variable revenue

and the estimate of standalone selling

price of performance obligations.

Decrease in

credit ra ting

of airlines

under

interline

arrangements

Interline receivables

Various deposits

with vendors,

manufacturers,

airports and lessors.

Receivable from

travel agencies and

deposits with

hotels/resorts

— IFRS 9.5.5.17

— Hot topics: Q1 Economic

events Potential impacts of

economic disruption on

expected credit losses under

ASC 326

— Insights to IFRS 7.8.237.20

Question:

Does expected credit loss (“ECL”)

estimates need to be adjusted for the

(i

) c

redit rating of the airlines and (ii

)

unce

rtainty in economi

c

e

nvironment

?

— ECLs are a probability-weighted

estimate of credit losses at the

reporting date. Such an estimate needs

to consider relevant possible future

scenarios based on a range of

expectations at the reporting date,

using information available at that date.

— If this happened within financial year-

end, the ECL estimates need to be

adjusted for.

— If this happened after financial year-

end, no adjustment for e vents occurring

after the reporting date would usually

be appropriate unless information

received after the reporting date

indicates that there was a failure to

consider appropriately all information

that was reasonable available at the

reporting date.

— However, if there is a possible material

impairment loss in the subsequent

reporting period resulting from new

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Airlines | 12

Financial reporting implications of COVID- 19

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information available after the reporting

date, a post balance sheet event

disclosure would be appropriate.

Covid-19

Effects

Relevant

Accounts/

Disclosures

Accounting and Auditing

Standard Guidance

Financial Reporting Considerations

Breach of

loan

covenants

—

Borrowings

— IAS 1.69(d)

— Insights to IFRS 3.1.40.110

— If the breach happened within financial

year-end,

- Waiver o btained within financial year-

end: Borrowings continue to be

classified as non-current

- Waiver o btained after f inancial year-

end (before the authorization date):

Borrowings should be classified as

current. Disclosures of waiver to be

made.

— Breach of loan covenants after financial

year-end should be treated as an

adjusting event and the related liability

should be classified as current at the

reporting date.

— Review of agreements with credit card

companies for c hanges in the timing of

cashflows will require assessment.

Deferrals of

ongoing/

planned

investments

— Prepayment

— Non-refundable

deposits

— Refundable

deposits

— IAS 36

— IFRS 9

— IAS 28

— .Impairment indicators to be

considered.

— Where carriers have significant

influence over o ther carriers and are

applying associate accounting, the

engagement team should consider

whether a ny loans are likely to be

repayable in the foreseeable future. If

not, they should be treated as part of

the equity interest.

Restructuring

and employee

entitlements

— Employee

provisions;

— Redundancy

provisions

— Annual lease /

Employee

entitlements

— IAS 37

— IAS 19

— Entities need to consider w hether t he

criteria for recognition of redundancy

provisions are met at the reporting date;

— Entities need to consider future

employee salary increase assumptions

used in existing liability calculations

(such as annual leave, having regard to

changing circumstances). The

“duration” of when annual leave is

taken may also be impacted if airlines

are forcing employees to utilize annual

leave during the fleet grounding to

levels which significantly impact

duration assumptions and the related

discounting of the liability;

— Entities need to consider the

appropriateness of any bonus

provisions and remuneration

disclosures.

Onerous

lease

provisions

— Other

provisions

— IAS 37 — Entities need to consider w hether

onerous contracts have been triggered

(e.g. if airlines are making strategic

decisions regarding exiting of certain

routes etc.).

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Airlines | 13

Financial reporting implications of COVID- 19

-

Covid-19

Effects

Relevant

Accounts/

Disclosures

Accounting and Auditing

Standard Guidance

Financial Reporting Considerations

Declines in

profits/ losses

— Deferred tax

assets

— IAS 12.35 and .36

— Insights to IFRS 3.13.360.10

— IAS 1.122 to 125

— Scrutiny needs to be placed on whether

the ‘future taxable profits’ forecasted by

management have considered the

impact of COVID-19.

— Disclosures of judgement and sources

of estimation uncertainty involved in

determining future taxable profits.

Alternative

performance

measures

— ESMA guidance on alternative

performance measures – 2015

— Where alternative performance

measures (“APMs”) are used,

disclosures in respect of any

adjustment to those measures,

particularly in providing issuers

information on cash flow generation

and underlying performance need to be

considered. Engagement teams should

consider w hether o ther measures

around liquidity and unencumbered

assets, for in stance, should be given

more prominence.

Commissions

— Contract costs — IFRS 15.94

— IFRS 15.101

— FASB ASC 606

— AICPA Audit and Accounting

Guide, Revenue Recognition

Chapter 1 0 Airlines

— Practical expedient to expense

(amortization period is 1 year o r le ss)

may not be met.

Lease

commitments

Some lease contracts contain clauses of

default related with financial situation of the

airlines, in order to prevent a bankruptcy. It is

probable that lessors are sending

“Reservation Right Letters” to protect their

position, and the impact of these letters must

be evaluated.

Impact in

Control

Environment

of airlines

Reduction in staffs in the operational and

administrative sides could affect significantly

to the control environment in the airlines in

this stress situation

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Airlines | 14

Financial reporting implications of COVID- 19

-

–

-

References

— IATA Press Release No. 18: IATA pressroom 2020-03-24-01

— COVID-19 impact on Aircraft Values (published by Ascend by Cirium): Video

Evolving information

The potential global and economic impacts of the coronavirus continue to evolve rapidly. Airlines should monitor

the situation as changes in circumstances may require additional or revised disclosure in current and future filings.

Disclosures should include material, relevant information for investors as of the date of the periodic filing.

Companies are encouraged to maintain close communications with their board of directors, external auditors, legal

counsel and other service providers as the circumstances progress.

Contact Us

Global Head of Aviation

Malcolm Ramsay

malcolmramsay@kpmg.com.sg

+65 650 856 81

KPMG in Singapore

Aviation Head - India

Ashwin Noronha

ashwinnoronh[email protected]

+91 124 334 5428

KPMG in India

Aviation Head - Europe

John Luke

[email protected]

+44 207 311 6461

KPMG in the UK

Aviation Head Japan

Tomoyoshi Inoue

[email protected]

+81 335 485 802

KPMG in Japan

Aviation Head - North America

Randy Green

[email protected]om

+1 214 840 2994

KPMG in the US

Aviation Head - Middle east

Avtar Jalif

[email protected]m

+97 124 014 860

KPMG in Abu-Dhabi

Aviation Head - Africa

Miesh-Al Gasant

[email protected]

+25 821 355 200

KPMG in Mozambique

Aviation Head - Australia

Paul J, Foxlee

[email protected]

+61 2 9335 7438

KPMG in Australia

Aviation Head - South America

Eliseo Llamazares

eliseollamazares@kpmg.com

+56 229 971 275

KPMG in Chile

Aviation Head - China

Tina W ang

tina.pj.wang@kpmg.com

+86 203 813 8207

KPMG in China

kpmg.com/socialmedia

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to

provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in

the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation.

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KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind

Airlines | 15

Financial reporting implications of COVID- 19