riers subject to this system of accounts and reports.

[ER-369, 27 F.R. 12818, Dec. 28, 1962]

Sec. 1-2 Waivers from this system of accounts and reports.

A waiver from any provision of this system of accounts or reports may be made by the Civil Aeronautics Board upon its own initiative or upon the submission of written request therefor from any air carrier, or group of air carriers, provided that such a waiver is in the public interest and each request for waiver expressly demonstrates that: existing peculiarities or unusual circumstances warrant a departure from a prescribed procedure or technique; a specifically defined alternative procedure or technique will result in a substantially equivalent or more accurate portrayal of operating results or financial condition, consistent with the principles embodied in the provisions of this system of accounts and reports; and the application of such alternative procedure will maintain or improve uniformity in substantive results as between air carriers.

Sec. 1-3

General description of system of accounts and reports.

(a) This system of accounts and reports is designed to permit limited contraction or expansion to reflect the varying needs and capacities of different air carriers without imparing basic accounting comparability as between air carriers. In its administration three air carrier groups, designated Group I, Group II, and Group III, respectively (see section 04), are established by the Civil Aeronautics Board. This grouping will be reviewed from time to time upon petition of individual air carriers or by initiative of the Civil Aeronautics Board with the view of a possible regrouping of the air carriers.

(b) Under the system of accounts prescribed, balance sheet elements are accounted for by all air carrier groups within a fixed uniform pattern of specific accounts. All profit and loss elements are accounted for within specific objective accounts established for each air carrier group resulting from dual classifications, designated for each air carrier group, which are descriptive of both basic areas of financial activity, or functional operation, and objective served. The profit and loss elements of the three

air carrier groups can be reduced to broad objectives and general or functional classifications which are comparable for all air carrier groups. Both balance sheet and profit and loss accounts and account groupings are designed, in general, to embrace all activities, both air transport and other than air transport, in which the air carrier engages and provide for the separation of elements identifiable exclusively with other than air transport activities. Profit and loss elements which are recorded during the current accounting year are subclassified as between (1) those which relate to the current accounting year and adjustments of a recurrent nature applicable to prior accounting years, and (2) extraordinary items of material magnitude.

(c) In order to afford air carriers as much flexibility and freedom as possible in establishing ledger and subsidiary accounts to meet their individual needs, a minimum number of account subdivisions have been prescribed in this Uniform System of Accounts. It is intended, however, that each air carrier, in maintaining its accounting records, will provide subaccount and subsidiary account segregations of accounting elements which differ in nature of accounting characteristics, in a manner which will render individual elements readily discernible and traceable throughout the accounting system, and will provide for relating profit and loss elements to applicable balance sheet counterparts. Sec. 1-4

System of accounts coding.

(a) A four digit control number is assigned for each balance sheet and profit and loss account. Each balance sheet account is numbered sequentially, within blocks, designating basic balance sheet classifications. The first two digits of the four digit code assigned to each profit and loss account denote a detailed area of financial activity or functional operation. The first two digits, thus assigned to each profit and loss account, are numbered sequentially within blocks, designating more general classifications of financial activity and functional operation. The second two digits assigned to profit and loss accounts denote objective classifications.

(b) A fifth digit, appended as a decimal, has been assigned for internal control by the Civil Aeronautics Board of prescribed subdivisions of the primary

(a) The general books of account and all books, records, and memoranda which support in any way the entries therein shall be kept in such manner as to provide at any time full information relating to any account. The entries in each account shall be supported by such detailed information as will render certain the identification of all facts essential to a verification of the nature and character of each entry and its proper classification under the prescribed Uniform System of Accounts. Registers, or other appropriate records, shall be maintained of the history and nature of each note receivable and each note payable.

(b) The books and records referred to herein include not only accountnig records in a limited technical sense, but all other records such as organization tables and charts, internal accounting manuals and revisions thereto, minute books, stock books, reports, cost distributions and other accounting work sheets, correspondence, memoranda, etc., which may constitute necessary links in developing the history of, or facts regarding, any accounting or financial transaction.

(c) All books, records and memoranda shall be preserved and filed in such manner as to readily permit the audit and examination thereof by representatives of the Civil Aeronautics Board. All books, records and memoranda shall be housed or stored in such manner as to afford protection from loss, theft, or damage by fire, flood or otherwise and no such books and records shall be destroyed or otherwise disposed of, except in conformance with Part 249 of the Economic Regulations of the Civil Aeronautics Board for the preservation of records.

Sec. 1-6 Accounting entities.

(a) Separate accounting records shall be maintained for each air transport entity for which separate reports to the

Civil Aeronautics Board are required to be made by sections 21(1) or 31(h), applicable, and for each separate corporate or organizational division of the air carrier. For purposes of this Uniform System of Accounts and Reports each nontransport venture as delineated pursuant to paragraph (b) of this section undertaken by the air carrier whether or not formally organized within a distinct organizational unit shall be treated as a separately operated organizational division.

(b) As a general rule any activity or group of activities comprising a nontransport function provided for in incidental revenue accounts 10 through 18 shall be considered a separate nontransport venture under circumstances in which either: (1) A separate corporate or legal entity has been established to perform such services, (2) the aggregate annual revenue rate, as determined in section 2-1 (d), during either of the past 2 years exceeds the greater of $1 million per annum or 1 percent of the air carrier's total annual transport revenues, or (3) the aggregate annual expense rate, as determined in section 2-1(d), during either of the past 2 years exceeds the greater of $1 million or 1 percent of the carrier's total annual operating expenses: Provided, That nontransportation revenue service performed in-flight, interchange sales and mutual aid assistance shall be considered as incidental to the air transportation activity and accounted for accordingly, regardless of the revenue or expense standard set forth above. Other nontransport revenue services which do not meet the foregoing standards shall be also considered as incidental to the air transportation and shall be accounted for accordingly.

(c) The records for each required accounting entity shall be maintained with sufficient particularity to permit a determination that the requirements of section 2-1 have been complied with. [ER-707, 36 F.R. 20935, Nov. 2, 1971] Sec. 1-7 Interpretation of accounts.

To the end that uniform accounting may be maintained within the prescribed system, questions involving matters of significance which are not clearly provided for should be submitted to the Director, Bureau of Accounts and Statistics, for explanation, interpretation, or resolution.

[FR 483, 32 FR. 2809, Feb. 11, 1967]

dental" services, in the assignment thereto of proportionate direct overheads, as well as direct labor and materials, of the applicable expense functions prescribed by this system of accounts and reports, and (2) with respect to separate ventures, in the assignment thereto of proportional general and administrative overheads as well as the direct overheads, labor, and materials.

(e) In accordance with the provisions of sections 22(d) or 32(d), as applicable, each air carrier shall file a statement with the Civil Aeronautics Board which details the practices and techniques used in directly assigning and prorating revenues and expenses, or costs, in compliance with the provisions of this section. [ER-707, 36 F.R. 20935, Nov. 2, 1971]

Sec. 2-2 Distribution of revenues and expenses within entities.

(a) Revenues and expenses attributable to a single natural objective account or functional classification shall be assigned accordingly.

(b) Revenue and expense items which are common to two or more natural objective accounts shall be recorded in the objective accounts to which they predominantly relate.

(c) Expense items contributing to more than one function shall be charged to the general overhead functions to which applicable except that where only incidental contribution is made to more than a single function an item may be included in the function to which primarily related, provided such function is not distorted by including an aggregation of amounts applicable to other functions. When assignment of expense items on the basis of the primary activity to which related does not in the aggregate result in a fair presentation of the expenses applicable to each function, apportionment shall be made between functions based upon a study of the contribution to each function during a representative period.

Sec. 2-3 Transactions in foreign currencies.

(a) All accounts provided herein shall be stated in terms of United States Currency.

(b) Amounts to be entered in the accounts of this system that originate in terms of foreign currencies, shall be initially recorded in United States Currency at the rates of exchange realizable

at the date of the original transaction, except as provided in paragraph (g) of this section 2-3, unless free conversion is not permitted and governmentally controlled rates are prescribed, in which case the latter rates shall be used.

(c) Current assets and liabilities shall be restated in the accounts at the end of each quarterly accounting period at rates of exchange then realizable, except as provided in paragraph (g) of this section 2-3, unless free conversion is not permitted and governmentally controlled rates are prescribed in which case the latter rates shall be used.

(d) Noncurrent assets and liabilities shall be reflected in the accounts at the freely realizable, or governmentally prescribed, rates of exchange prevailing at the date of the original transaction and shall not be revalued to reflect subsequent changes in rates of exchange, except to reflect permanent changes in value resulting from general monetary revaluations.

(e) Unrealized gains or losses developing in the course of normal routine restatements of current assets and liabilities in conformance with day-to-day fluctuations in rates of exchange shall be entered in profit and loss classification 4600 Incidental Revenues-Net. Unrealized gains or losses of a nonroutine or an abnormal character shall be entered in profit and loss classification 8100 Nonoperating Income and Expense-Net.

(f) Realized gains or losses resulting from normal routine differences between the rates at which assets and liabilities are stated in the accounts and the rates of exchange existing at the date of realization, liquidation, or settlement, shall be entered in profit and loss classification 4600 Incidental Revenues-Net. Realized gains or losses of a nonroutine or an abnormal character shall be entered in profit and loss classification 8100 Nonoperating Income and Expense-Net.

(g) Standard rates of exchange which are reasonably representative of currently realizable rates of exchange, or governmentally controlled rates where free conversion is not permitted, may be used for originally recording each transaction and for quarterly restatements of current assets and current liabilities provided such standards are redetermined at least once each accounting year or oftener as may be necessary to reasonably approximate currently realiz

able or officially prescribed rates of exchange at the close of each calendar quarter.

reserves

(h) Provisions shall not be made by charges against income for against anticipated changes in exchange rates during future accounting periods. Sec. 2-4 Accounting period.

(a) The accounting year of each air carrier subject to this Uniform System of Accounts shall be the calendar year unless otherwise approved by the Civil Aeronautics Board.

(b) Each air carrier shall keep its financial accounts and records on a full accrual basis for each quarter so that all transactions, as nearly as may reasonably be ascertained, shall be fully reflected in the air carrier's books for the quarter in which revenues have been earned and the costs attaching to the revenues so earned in each quarter have been incurred independently of the incidence of sales or purchases and settlement with debtors or creditors.

(c) Expenditures incurred during the current accounting year which demonstrably benefit operations to be performed during subsequent accounting years to a significant extent shall be deferred and amortized to the period in which the related operations are performed when of sufficient magnitude to distort the accounting results of the year in which incurred.

(d) Expenditures charged directly or amortized to operations within one accounting year shall not be reversed in a subsequent accounting year and reamortized or charged directly against operations of subsequent years except that retroactive adjustments are permitted where necessary to conform with adjustments required by the Civil Aeronautics Board for rate making purposes provided a statement explaining the detailed adjustments is submitted for review by the Civil Aeronautics Board. (See section 22(d) or 32(d), as applicable.)

[ER-327, 26 F.R. 4222, May 16, 1961, as amended by ER-369, 27 F.R. 12818, Dec. 28, 1962]

Sec. 2-5 Liability accruals.

Charges shall be made against income and accruals made for only those liabilities for which a definitely demonstrable

obligation exists. Where a definite obligation has been incurred, such as for accrued vacation or dismissal compensation and the precise liability has not been determined, an estimate may be made of the currently existing liability on such actuarial or other bases as can be justified from available information, provided that balances are re-evaluated and adjusted at least once each accounting year to accurately reflect the true detriment (or cost) to the air carrier. Sec. 2-6 Federal income tax accruals.

(a) All income taxes shall be accrued by proportionate charges or credits to income each calendar quarter in such manner as will allocate the charges for taxes, or the tax credits for losses, to the periods in which the related profits or losses respectively, are reflected. (See section 8 (d) (4).)

(b) The general policy in respect to the accrual of income taxes for each accounting period will require that the air carrier take up in its accounts an amount equivalent to the actual tax liability applicable to the period as computed or estimated on the basis of income tax laws and regulations then in effect. As a general rule the accrual of income taxes on differences between income recognized for book purposes and tax purposes is prohibited. However, Federal income taxes may be deferred for material income differences associated with airworthiness reserve or self-insurance reserve provisions, depreciation allowances under provisions of section 167 and 168 of the Internal Revenue Code, and different treatments for book and tax purposes of preoperating, aircraft integration, route extension or other developmental expenses. In the event a carrier elects to follow deferred tax accounting for one or more of the foregoing income differences, it shall do so for all of such income differences, on a consistent basis both within each accounting year and as between accounting years. In effecting the accruals, records with respect to reserves for deferred taxes on income shall be maintained in accordance with the provisions of balance sheet account 2340 Deferred Federal Income Taxes.

(c) Investment tax credits shall be accounted for in accordance with the