American Air to record $900 mln accounting charge

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This is not as big of a deal as some might think...

From this morning's SEC filing:
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AMR Corporation (AMR or the Company) first disclosed this new accounting pronouncement in its second quarter 2001 Form 10-Q, and noted that it was evaluating its impact on the Company. Most recently, the Company disclosed in its second quarter 2002 Form 10-Q that it had completed the first step of its goodwill impairment analysis and determined AMR's net book value was in excess of its fair value at January 1, 2002. Furthermore, the Company disclosed it was in the process of completing the second step of the impairment analysis, which would likely result in AMR recording a pre-tax charge of up to $1.4 billion to write-off the Company's goodwill. AMR's goodwill balance of approximately $1.4 billion included amounts related to the acquisitions of Reno Air, Inc., ACI Holdings, Inc. (AirCal), AMR Eagle acquisitions and certain assets from Trans World Airlines, Inc.

The Company has now completed the second step of the impairment analysis and concluded that AMR's entire goodwill balance is impaired as defined by SFAS 142. As a result, the Company will record a one-time cumulative effect of a change in accounting of approximately $990 million after taxes. This charge will be recorded as of January 1, 2002, is nonoperational in nature and has no impact on cash flows. This charge does not affect AMR's or American Airlines, Inc.'s financial covenants in any of its credit agreements.
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TWAFA007

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Sep 2, 2002
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On 10/7/2002 9:35:45 AM eolesen wrote:

This is not as big of a deal as some might think...

Aloha eolesen,

You are one of a few that think that. The Street thought otherwise. AMR closed down 13% at $3.76 on that news. You dont take an accounting charge of nearly a Billion dollars and say that, its not a big deal. AMR is getting closer to my $3 call and the war hasnt even started yet.

ALOHA, 007
 

JFK777

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When a firm buy another and pays more then the book value( the value the company being acquired has on its balance sheet for that asset) goodwill gets created. This is an accounting tool that has been used for decades, well before Enron or Worldcom. Goodwill used to be amortized for 40 years now it can be written off as a one time charge, it is just changing the value of certain assets already owned( cash paid) by AA to a lower value, thus the non cash part.
 

WingNaPrayer

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Good will is actually blue sky but the bottom line is that AMR paid nearly a billion dollars more for some of it's acquisitions than they were worth....but then that's the price you pay when you gobble so no one else can get it.
 

AV8NSIGO

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[blockquote]
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On 10/7/2002 8:36:48 PM Bob Owens wrote:

Is'nt this similar to what happened in 92?
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Yes...and no.

In 1992, while I was still at AA, Crandall implemented a fare structure which the industry refused to match. I believe it was Simple SAAver. There were four fares...one for first class, one for full fare coach, one 14-day advance purchase fare and a 21-day advance purchase fare. It was a good idea, yet AA took a blood bath in the resulting fare war.

There was also a $165 million write off for a project involving Marriott, a car rental company (Avis?) and someone else for a one-stop CRS for the business traveler. I don't remember the name. The project was a flop and the $165 million was a result of the penalties paid to AA's partners, R&D costs and other expenses.

This also occured at a time AA was in bitter, extended contract negotiations with APFA. AA/AMR did anything possible to make the financial losses seem worse than they really were. As you may remember, this was one of many factors leading to the flight attendant strike of 1993.

The similarity is they took the losses in one year as a one-time charge. I don't recall there being any change in accounting practices as this appears to be. However, since negotiations with the APA have commenced, I fully expect AMR to point to this $900 million charge as one reason they can't meet APA's many demands.
 

Busdrvr

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[blockquote]
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On 10/7/2002 5:01:18 PM TWAFA007 wrote:

This is not as big of a deal as some might think...

Aloha eolesen,

You are one of a few that think that. The Street thought otherwise. AMR closed down 13% at $3.76 on that news. You dont take an accounting charge of nearly a Billion dollars and say that, "its not a big deal." AMR is getting closer to my $3 call and the war hasnt even started yet.

ALOHA, 007
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Don't forget, there were informed ANALyst who still had buy ratings on Worldcom and Enron all the way up until the end. Remember NASDAQ 5000? Lot's of smart investors huh?! It is wise to get as much off the books now, when you're losing money. Then when the economy turns, lookout! You've got to think of the Tax implications.
 
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