Business Management

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7th International Scientific Conference “Business and Management 2012” May 10-11, 2012, Vilnius, LITHUANIA

ISSN 2029-4441 print / ISSN 2029-929X online ISBN 978-609-457-116-9 CD doi:10.3846/bm.2012.036 http://www.bm.vgtu.lt © Vilnius Gediminas Technical University, 2012

THE INFLUENCE OF DEPRECIATION POLICIES ON FINANCIAL STATEMENT ANALYSIS: A CASE STUDY OF AIRLINE INDUSTRY Xiaosong Zheng1, 2, Yingya Guo3, Jiali Xu4 Tallinn School of Economics and Business Administration, Tallinn University of Technology, 19086 Tallinn, Estonia Email: xiaosong.zheng@ttu.ee 2, 3, 4 Sydney Institute of Language and Commerce, Shanghai University, 201800 Shanghai, China Email: xiaosong.zheng@shu.edu.cn; 3yyguo09@shu.edu.cn; 4zerozita@shu.edu.cn Abstract. The public and professionals are gradually taking the quality of financial statement of airline’ companies into account since the global airline industry plays a vital role within the international business community. However, methods of airline financial reporting and disclosure vary significantly from country to country due to different accounting standards. This disparity in accounting disclosure represents a large obstacle to the growing globalization of business as international investors need comparable financial information to assess the financial health of different companies. This paper will illustrate one of issues observed in the airline industry called the estimation of depreciation expenses, which exerts a huge influence on the stated revenue since depreciation is a major expense in the industry. Assisted by classical financial analysis, we find that companies can perform different depreciation estimation practices which are allowed by different accounting practices to manage earnings. Keywords: financial statement, depreciation policies, airline industry, estimation, ratio. Jel classification: M41 1

1. Introduction The airline industry has faced complex regulations and divergent accounting standards (KPMG 2005). This situation has raised concern that firms can abuse the discretion that different accounting standards allow (Holland, Ramsay 2003). Firms reveal information through their accounting policies and invertors regard financial statement as the most important source of information for investmet decisions (Chang, Most 1981). For investors, the profitability is the pivotal factor for assessment. In the meantime investors must assess the quality of profitability to ensure the comparability of information (Best). Chong and his colleagues (2000) assert that variations caused by an industry factor should be eliminated, or at least reduced, thus, it requires more analysis. The International Accounting Standards Committee [IASC] (2000) and Choi et al. (1984) stated that the worldwide disparity in accounting practices is a large impediment to the growing trend in the internationalization of corporate activities and the growing globalization of business and capital markets. Harmonization of accounting policies between airlines enables greater comparability for stakeholders when reviewing the paper of different airline (KPMG 2005). However, accounting policies are influenced by a good number of factors, such as the governmental regu-

lation, economic and political factors as well as cultures, and customs (Philips et al. 2004). To some extent, it is difficult to ensure that every related field is satified about the result, which leads to a trade-off in relevance, reliability, comparability, timeliness and completeness. Since a growing number of professionals realize the importance of the financial reporting quality, the convergence of financial disclosure method is demanded (Purvis, Gernon, Diamond 1991). In the airline industry, depreciation is a major expense. Although depreciation is not a cash item, it influences stated profitability and asset values in the balance sheet, tax, and stock price of a company (Tarry 2010), so managers have the incentive to do earnings...
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