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The AAO Weblog covers accounting issues and current events as they relate the practice of investment analysis. All posts prior to September, 2007 are in the public domain, but after September 4, only subscribers to The Analyst's Accounting Observer will see all posts going forward. Only selected, occasional posts will be released to the public domain from September 4 forward.

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Lease Restatements Take Flight
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Posted by: Jack Ciesielski 7/20/2005 7:33 AM
Just when you thought it was safe to lease again. Or account for leases, at least.

Continental Airlines filed an amended first quarter '05 10-Q and 2004 10-K because of incorrect operating lease accounting. This is the first airline I recall having lease accounting issues this year.

The problems centered on accounting for rent escalations and depreciation on leasehold improvements at airports and other facilities. The total lease expense adjustment for the proper accounting of rent escalations is $81 million, from 1993 through 2004; amounts range from $3 million to $12 million per year. The total depreciation expense adjustment is $30 million, for years between 1993 to 2004; adjustment amount run between $1 million to $6 million per year.

The correction added $2 million more of rent expense and depreciation to the 1Q05 net loss; no change in income taxes. For 1Q04, the restatement added $2 million more of additional rent expense and depreciation and a $29 million reduction of income tax benefit.

Don't hyperventilate yet, but there could be more of them. Once one player in an industry has uncovered an error like this, there's a burden on the others in the group - and their auditors - to consider the possibility that there could be a similar issue in their own house. The next couple weeks will be telling.
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