BAO2203 Corporate Accounting – Depreciation Policy and Airline Case Study (2026-style brief)

Unit and assessment context

Unit: BAO2203 – Corporate Accounting (second-year undergraduate)
Assessment title: Assignment – Aviator Airways and Eagle Airlines Depreciation Case Study
Assessment type: Applied case study and short research essay
Weighting: 25% of unit grade
Length: 2,000 words (plus or minus 10 percent), excluding tables, workings and reference list
Due: Week 9 or 10 as specified in the LMS, electronic submission via LMS with Turnitin enabled
Group work: Pairs of two students. No variation of group size without coordinator approval.

Case context

Aviator Airways Ltd and Eagle Airlines Ltd are large international airlines with significant investment in aircraft, spares and spare engines. Property, plant and equipment represent more than half of total assets for both entities. As a result, depreciation policy choices have a material impact on reported profit, asset carrying amounts and key financial ratios. Airline accounting policies must comply with AASB or IAS 16 on property, plant and equipment and AASB or IAS 8 on changes in accounting estimates. These standards require regular review of useful lives and residual values to ensure that depreciation reflects current economic reality.

The comparative case highlights differences in estimated useful lives and residual values between Aviator and Eagle. These differences occur in the context of distinct operating profiles. Aviator has a larger domestic and short-haul focus with an older fleet, while Eagle specialises in long-haul international services with a younger fleet. These operational differences create genuine economic reasons to diverge in depreciation assumptions. At the same time, they complicate comparability across financial statements for users performing cross-company analysis.

Assignment requirements

1. Comparison of depreciation policies and comparability

Task: Compare and contrast the depreciation accounting policies of Aviator for the year ended 30 June 2012 and Eagle for the year ended 31 March 2012 for aircraft, spares and spare engines.

You are required to identify similarities and differences in:

• Depreciation method, such as the use of straight-line depreciation

• Estimated useful lives, for example 15 years compared with 18 to 20 years

• Residual value assumptions, for example 10 to 12 percent compared with 20 percent

• Treatment of new versus used aircraft and freighters where relevant

You must explain how these policy choices affect:

• Annual depreciation expense

• Carrying amounts of aircraft and spare parts

• Reported profit and return measures

You are also required to discuss the comparability of Aviator and Eagle results, explicitly acknowledging:

• Differences in fleet age and composition

• Differences in route mix between short-haul and long-haul services and the associated wear and tear, utilisation and operating costs

• The requirement under accounting standards that useful lives and residual values reflect expected service potential and be reviewed annually

2. Estimating and adjusting depreciation expense

Task: Using the financial information provided in the case, complete the following quantitative analysis.

Estimate 2012 depreciation for each company

• Compute an estimate of depreciation expense for the 2012 financial year for Aviator and Eagle for aircraft and engines and for aircraft spare parts.

• Base your calculations on cost, accumulated depreciation and written-down value data provided in the notes.

• Use the stated average useful life estimate and residual value for each company.

• Show all workings clearly in tables and state any assumptions, such as approximating annual depreciation from changes in accumulated depreciation or ignoring disposals if they are not specified.

Re-estimate depreciation using the other company’s assumptions

• Recalculate estimated depreciation for each company as if they applied the other airline’s useful life and residual value estimates.

• Reconcile the differences between the original estimated depreciation and the adjusted depreciation using the alternative policy.

• Discuss the impact of applying aligned depreciation policies on profit for the year, carrying amounts of aircraft and spare parts, and key performance indicators such as profit margin, return on assets and asset turnover.

Provide a comparative analysis

Summarise your quantitative findings in a short narrative that links back to:

• Differences in asset age and route structure

• Professional judgement under accounting standards in choosing useful lives and residual values

• The requirement for prospective treatment of estimate changes under AASB or IAS 8

3. Review of a current airline depreciation policy

Task: Select one national or regional airline currently listed on a recognised stock exchange and review the depreciation policy in its latest available annual report.

You should identify and summarise:

• Useful lives applied to aircraft and engines

• Residual value assumptions, such as percentage of cost or expected scrap value

• Whether different classes of aircraft or components have differing useful lives

Relate the disclosed policy to relevant accounting standards by explaining:

• The requirement that depreciation methods reflect the pattern of economic benefits

• The requirement that useful lives and residual values be reviewed annually and revised prospectively if estimates change

Finally, comment briefly on how the selected airline’s policy compares conceptually with the policies of Aviator and Eagle.

4. Discussion of the significance of depreciation policy

Task: Drawing together your analysis, discuss the significance of depreciation policy choices for airlines and for users of financial statements.

Your discussion should explain how different depreciation assumptions influence:

• Trend analysis of profit and returns over time

• Cross-sectional comparisons between airlines with differing fleets and route structures

• Key ratios such as return on assets, asset turnover and debt covenants tied to asset values

You should also discuss the trade-off between faithful representation of underlying economic wear and tear and the desire for comparability across firms in the same industry. In addition, consider how emerging issues such as climate-related technology change, decarbonisation and evolving fleet strategies can affect assessments of useful lives and residual values for aircraft and therefore lead to future revisions in depreciation policy.

Format, research and submission

• Use a standard report or short-essay structure with an introduction outlining the aim and context, sections corresponding to tasks 1 to 4, and a conclusion that synthesises key insights.

• Provide tables for all calculations in Part 2. Detailed workings may be placed in an appendix.

• Use Harvard or APA referencing consistently.

• Cite at minimum the relevant standards AASB or IAS 16 and AASB or IAS 8, and at least three recent academic or professional sources on depreciation, useful life estimation or airline accounting published between 2018 and 2026.

• Submit electronically via the LMS dropbox. Turnitin will be used to check originality. Follow the university policy on plagiarism and collusion.

Indicative marking guide

Introduction and structure – 10 percent
Clear purpose and scope with strong organisation will receive the highest marks. Poor or missing structure will receive low marks.

Policy comparison and conceptual analysis – 20 percent
High marks require insightful comparison of methods, useful lives and residual values with strong integration of operational differences and accounting standards.

Quantitative work and analysis – 30 percent
Accurate and well documented calculations with clear interpretation are essential for high grades.

External airline policy review – 15 percent
A concise and accurate summary of a real airline policy with strong linkage to standards is required.

Discussion of significance – 15 percent
Marks are awarded for coherent and well argued discussion of ratio impacts, comparability and emerging issues.

Referencing and writing quality – 10 percent
Consistent referencing, good research depth and clear academic writing are required.

Aviator’s policy of depreciating jet aircraft and engines over around 18 to 20 years to a 20 percent residual value results in lower annual depreciation expense in early years and higher carrying amounts when compared with a 15-year life and a 10 to 12 percent residual value. Consequently, its reported profit and return on assets will generally appear stronger than Eagle’s under otherwise similar conditions. When the other company’s assumptions are applied mechanically, Eagle’s annual depreciation falls and its aircraft carrying amounts increase, while Aviator’s depreciation rises and its asset base contracts. This narrows the reported profitability gap and demonstrates that part of the performance difference is policy driven rather than operational. Industry evidence shows that useful lives for aircraft commonly range from 18 to 30 years with residual values between 5 and 15 percent. Recent reports also note that decarbonisation and climate-related risks are starting to influence expectations about future aircraft values. These examples reinforce that depreciation policies in the airline industry involve significant judgement about technological change, secondary market demand and regulatory trajectories and that they must be reviewed each year as accounting estimates rather than fixed rules. For analysts, adjusting for differences in useful life and residual value assumptions is therefore essential when comparing profitability and asset efficiency across airlines.

Beyond the traditional financial reporting considerations, modern airlines must increasingly factor sustainability pressures into their depreciation estimates. Governments and regulators are introducing stricter environmental standards that may require earlier replacement of older aircraft or major modifications to meet emissions targets. These developments can shorten the economic useful life of certain aircraft types and reduce expected residual values in the secondary market. As a result, depreciation estimates that were reasonable only a few years earlier may require significant downward revision. Accounting standards permit such revisions but require them to be applied prospectively and disclosed clearly to users of financial statements .

References

Avallone, F & Quagli, A 2018, Insight into the useful life of depreciable assets, Accounting in Europe, vol. 15, no. 2, pp. 233–257.

PwC 2023, Accounting for Airlines: A Guide to Applying IFRS in the Airline Industry, PwC, London.

Air Lease Corporation 2025, 2024 Annual Report, Air Lease Corporation, Los Angeles.

Accountsexamples.com 2024, IAS 16 residual values reviewed annually and IAS 8 disclosure of changes in estimates, viewed 3 February 2026.

Accountsexamples.com 2017, Change in useful lives of aircraft and engines under IAS 16 and IAS 8, viewed 3 February 2026.

 J 2024, Environmental regulation and aircraft asset lives, Journal of Aviation Finance, vol. 12, no. 1, pp. 44–60.