Question

Aria Aviation is an existing client of CA Partners. The auditors are aware that the impacts on airlines of the recent COVID-19 events have been severe with predictions of a prolonged downturn. Even though domestic travel restrictions are expected to ease soon, the recent collapse of other airlines such as Virgin Australia has prompted Aria Aviation to adopt a conservative approach, which includes using the downtime to perform both major and minor maintenance work on their fleet, and focusing on building their cargo revenues. Unlike some of its sector counterparts, Aria Aviation had, prior to the virus outbreak, posted substantial profits and had significant reserves on its balance sheet.

The client’s policies include the following:

Accounting Policy: Aircraft Maintenance Costs

Major costs:

An element of the cost of a new aircraft is attributed on acquisition to prepaid maintenance and is depreciated over a period ranging from three to ten years from the date of manufacture. Subsequent costs incurred which lend enhancement to future periods, such as long-term scheduled maintenance and major overhaul of aircraft and engines, are capitalised and depreciated over the length of period benefiting from these enhancements. Minor costs:

All other maintenance costs are charged to the income statement as incurred.

From previous audit work you have established that the prepaid maintenance that is embedded in the original cost of aircraft is calculated based on formulae and data including the activity levels of the aircraft and the scheduled cost (not the actual cost) of the maintenance activities.

The latest financial data from Aria Aviation shows that the aircraft and engines at cost (including major maintenance costs) have remained at a similar level compared to last year, before the COVID-19 situation. There is also little variation between this year’s and the previous year’s maintenance and depreciation expenses respectively.

Required:

What key assertions for the aircraft asset, maintenance expense and depreciation expense account are likely to be affected? Explain, only within the context of the given information, why you believe these assertions may be affected.

Prepare a table as shown below to provide your answers.

2

Account affected Key assertion affected and explanation why

Aircraft asset
Maintenance expense
Depreciation expense

Answer 1

Accounts affected	Explanation
Aircraft asset	Assets which provides future ecnomic benefit are capitalised and depreciated over the useful life of assets. The aircraft company the attributable cost of new aircraft on acquisition toprepaid maintenance account and depreciated over period of 3 to 10years. Due to pandemic corona virous has great impact on airline business so the FMV of assets of aircraft are definitely decreased. However the company charged all acquisition cost to prepaid maintenance it is dificult to company to revalued its assets as per fair value and depreciate. Also the expected residual value of asset may be impacted due to such situation Impact of covid 19 crisis will be long term on airline business, its may be 2 to 3 years but the Aircrafts life is 3 to 10 years. However executives should revise the value of assets at the mid of the year and provide for impairment of aircraft due to facor Covid 19.
Maintenance Expenses	Long term maintenance and major expenses incurred by Aria Aviation on overhaul aircraft and engine are capitalised and depreciated over the period of benefit accruing to the company. Capitalised cost of expenses will increse the depreciation expenses Maintenace cost of the comapny is remain simmilar as comapred to previous year, even if assets are idle the asset required to maintain by incurring cost. Requires workers to upkeep the assets and various othe cost shall be necessary. Employee cost are continuously charged to income statement. How ever fall in oil prices will limit the maintenance cost.
Depreciation expenses	Depreciation expenses dose not ceases even the assets become idle till the asset is fully depreciated. Area Avitation is depreciated Aircraft asset over a period. Due to covid 19 vaue of assets may decreased, if the company revise the value of assets depreciation will get reduced by small amount. But the impairment of loss onasset required to be recognised by the company Under usages method of depreciation, expenses of depreciation is zero if there is no use of asset or no production. Company required to review the method of depreciation applied by compnay at least once in year at the end of the year and if there is significant change in consumption of asset, then current method of depreciation can be changed to reflect the change in accounting estimate as mentioned by IAS. Based on this the company can change depreciation method to usage method to reduce depreciation in such down situation.