Jetrader - Winter 2016 - 39

2. A significant adverse change in the
extent or manner in which the aircraft is
being used or in its physical condition.
Example: The aircraft could be damaged
to the extent that it's not repairable,
affecting the operating value and residual value. Conversion from the commercial to freighter should be considered.
3. A significant adverse change in legal
factors or in the business climate that
could affect the value of an aircraft,
including an adverse action or assessment by a regulator.
Example: Aircraft values could be affected
by external factors or regulators such as
FAA/FARs (Federal Aviation Regulations)
or scope clauses.
4. An accumulation of costs significantly
in excess of the amount originally
expected for the acquisition, construction or maintenance of an aircraft.
Example: A rise in maintenance costs
controlled by a maintenance provider and
could affect the marketability and lease
rate for a specific aircraft or engine type.
Operators may opt for another aircraft
type that can service the same routes
with lower operating costs.
5. A current-period operating or cash flow
loss combined with a history of operating or cash flow losses, or a projection
or forecast that demonstrates continuing losses associated with the use of
an aircraft.
Example: Low aircraft demand could
affect lease rate or lead to parking of
aircraft. In other cases, the lessee may
terminate the lease, and the lessor has
no subsequent lessee lined up.
6. A current expectation that, more likely
than not, the aircraft will be sold or
otherwise disposed of before the end of
its previously estimated useful life. The
phrase "more likely than not" refers to
a level of likelihood that is more than
50 percent.
Example: A lessor's decision to sell an
aircraft early due to economic conditions
will affect the recoverability of the asset
group.

Estimates of Future Cash Flows
Used to Test an Aircraft Asset
for Recoverability4
Estimates of future cash flows used to
test the recoverability of an aircraft shall
include only the future cash flows (cash

inflows less associated cash outflows) that
are directly associated with and that are
expected to arise as a direct result of the
leasing and eventual disposition of the subject aircraft, and shall incorporate the entity's own assumptions regarding its use of
the aircraft.5 The assumptions shall include:
* Total useful life
* Future lease period(s)
* Future lease rates
* Residual or scrap value
* Average on ground time (in between
leases)
* Any additional income such as maintenance reserve income at end of lease
The assumptions used in developing those
estimates shall be reasonable in relation to
the assumptions used in developing other
information used by the entity for comparable periods, such as internal budgets
and projections. A probability-weighted
approach could also be used in considering
the likelihood of those possible outcomes.6

Total Useful Life
Estimates of future cash flows used to
test the recoverability of an aircraft shall
be made for the remaining useful life of the
aircraft to the entity. The remaining useful
life of an asset group shall be based on the
remaining useful life of the primary asset
of the group. Twenty-five years is typically
used, or referred to, as a typical useful life
in the aircraft industry. It is common for
aircraft leasing companies to depreciate
their aircraft on a 25-year useful life with
an assumed residual value of 10-15 percent.
However, if the fleet strategy is the leasing

of new aircraft and typically the aircraft is
sold after the first or second lease, then a
shorter useful life or cash flow period should
be considered with a higher residual.

Future Lease Period
and Lease Rates
Estimates of future cash flows used to
test the recoverability of an aircraft that is
under operating lease shall be based on the
leasing potential of that aircraft at the date
it is tested. Future lease period assumption
should be consistent with the historical
and anticipated lease terms based on a
number of factors such as market conditions, age of aircraft, first/second/third
lease, lessee credit rating, etc. An analysis
should be performed to assess the lease
term assumption for the entire fleet and
should include factors as noted above. The
ultimate conclusion should be supportable. Subsequent to the current lease term,
estimation of future lease rates is crucial.
Consideration to future lease rates should
include the supply and demand, any recent
transactional data points, length of lease
term, age/model/engine variant, lessee
credit rating, among other factors.

Residual or Scrap Value
Similar to a terminal value of a company or business at the end of the cash
flow period, a residual or scrap value shall
be added at the end of the useful life as
part of the total undiscounted cash flow
for the recoverability test. Depending on
the anticipated market condition at the
end of the lease, either a residual value or
Jetrader * Winter 2016 39
Jetrader - Winter 2016

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