Depreciation at Delta Air Lines: The “Fresh Start” Case Study Solution
Fixed Asset Valuation Methods
There are certain methods for reporting assets that are based upon the asset value. Delta Airlines after its fresh start is following the fair value method which tends to report the assets at a value which a potential buyer is willing to pay for the asset. A brief analysis of each of the method along with the uses of the reports based on these methods separately.
Historical Cost Method
Under historical cost method, the assets are reported in the balance sheet at a value that is equals to the cost of the asset minus the accumulated depreciation. It is one of the most used method for asset valuation. It does not provide the information regarding the true value of asset in the market, but provides an approximate information regarding the value of the asset.
Fair Value Method
Under fair value method, the firms are required to report the asset at its current value in the market that is the price at which a potential buyer is willing to buy the asset. Although, the method provides an accuracy regarding the value of the firm to management and the investors that are the major users of the financial reports, but it requires a lot of time to estimate the market value of an asset. Moreover, sometime the market value may be considered an over or under stated that could put a high impact on the valuation of stocks in the market.
Another problem with the method is that the market value of assets do not remain same for each year as in case of historical cost. It means that the companies using this method would require periodic valuation of their assets that is considered to be a time and cost consuming process.Dental market could face a lot of problems related to the determination of the market value of assets in near future. (Unknown, 2018)
Base-Asset Method
Under the base asset method, the assets are reported in the balance sheet at a current value of another asset whose value is directly attached to the asset. Under this method the Delta Airline could report its aircrafts at a value of another asset that is considered to be the base asset. This method although provides an approximate market value information regarding an asset but it could sometime understate or overstate an asset as no asset could be considered to be in perfect direct relation with the value of another asset.
Conclusion
In conclusion, it could be said that the fresh start with a fair value asset valuation method could be considered to be more risky than the historical cost method. Although, the fair value method could provide na accurate value for the assets of the company and helps the company to protect its shares to be overvalued in the market, but the fair value method is a time and cost consuming method that could led to increase in the financial difficulties related to reporting of the firms financials. Therefore, the company should be conservative in both i.e. estimating the life of its fleet and the asset valuation to get a foothold in the industry………
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