Depreciation cost out of nowhere

Hello

I operate a holding on Tempelhof where i have a bunch of aircraft leased. I never had in my income statement costs for Depreciation of flight equipment (this applies to owned aircraft afaik). Now this week i have 42.750 AS$ depreciation cost. How is this possible ? I didn’t buy any plane ever (only leased).

Any suggestion or idea why this occurs is appreciated

Changing the seats of an aircraft?

Yes, you’re right. Thank you!

Indeed i changed the seats on one aircraft. I didn’t know that this will go into Depreciation cost.

Can someone explain how this works? I could understand it if the seating was being depreciated continuously, but why on a change of seating?

Because the old equipment that was installed on the aircraft and its value lost. That needs to be put into the record somewhere in order to keep track of company value (or better yet, its assets).

You will, eventually at some point, foot a bill for depreciation on the equipment - even when you don’t change seats etc*

*I have found a few instances where this has happened and was unable to pin it to anything specific, so please correct me if i’m wrong.

Do you own aircraft? This should be used for the lost of value as the Airplane gets older.

Well my balance sheet shows an entry for flight equipment, which surely is a depreciating asset, so I assume there is some depreciation charged on some regular basis.

I ran into this issue today and frankly I am furious. Up until this week, my 'normal depreciation' on all leased aircraft ran about 10% of my lease payments. After I upgraded my interiors, my 'depreciation' jumped from $312,000 a week to $2.2M, or 62% of my leasing costs. Now here is my issue. I paid for the original seats, fair enough. If they are going to be depreciated, they could only depreciate to ZERO and no less IF I sell the seats at ZERO because I am not being given a credit for the sale of the seats I previously purchased. You cannot assume ZERO because they do have value. In other words, if I buy a set of seats for an aircraft for say $50K per a/c and later replace those seats, which have been depreciating in value over the time in service, unless depreciated to zero because I held them so long, meaning they would stop depreciating at a certain period. But if I buy new seats, the old seats, if not depreciated to zero would still have a residual value which I should be given credit for, offsetting the cost of the new seats. What it looks like is happening is you are paying cash for those seats, they depreciate and keep depreciating ad infinitum AND when you replace them, you are stuck for future depreciation AND the cost of new seats AND their depreciation. How else can one explain a jump from 10% of a leasing cost to 62% in just one week. Needless to say, not only did I pay for the new seats, but an additional $1.8M in one week for depreciation!!

I had the same this week. So this means that

1. You pay for your new seats the full price of the new seats

2. You pay for replacing the old seats the full price of the old seats¿¿¿¿¿¿¿¿¿¿¿¿¿

This is completely incorrect, it would then be cheaper to cancel the leasing contract and lease another plane, or lease your same plane back as the leasing cost will now be lower due to the plane being older and having flown more. I wish I had tried it with 1 plane rather than with my whole fleet type of 19 in one go. Out of the blue 575,700 AS$ on the books of a small startup in Africa is a heavy hit on the books. I've learnt now... never ever change seating, lease a different plane!

No. Every time you buy new seats, you pay for them

And every time you throw old seats away, you got the depreciation for them. So, if you cancel a leasing, the seats also get thrown away and the depreciation will be exactly the same.

But depreciation doesn't really matter - it does not affect your bank account.

When buying seats, it doesn't affect your profit (only the bank account) - the value of the seats is entered in your balance sheet.

When throwing away seats, it only affects the profit (not your bank account) - because you no longer own them and they are erased from your balance sheet.

Although it seems like you pay twice, you’re only paying once. It’s counter-intuitive, but that’s why colleges and universities make big bucks from accounting courses. After all, why sell one course, when you can sell four?

When you purchase seats, you increase the value of one asset (flight equipment) by decreasing the value of another asset (liquid cash). This affects the balance sheet and bank account, but not the income statement because nothing about this transaction contributes to your profit or loss. Because seats aren’t a depreciable asset in the game, they retain their book value whether they’re a week or twenty-five years old so their value sits there throughout their life contributing to your equity value.

Getting rid of seats is a different story though. Because we can’t sell old seats or reuse them, their value when not in the aircraft is nil. Therefore we fully depreciate their value by writing them off. In this transaction, we reduce an asset, but since no money changes hands, we aren’t reducing another asset by the same amount. We reduce equity instead, which shows up on the income statement as a depreciation charge, even though we haven’t actually paid for anything - we paid it when we bought them.

When you replace a seating configuration, you’re doing both simultaneously. In order, you reduce your seat value by increasing your depreciation, AND you increase your seat value by reducing your cash. It’s four transactions at once, two touching the balance sheet, one touching the income statement, and one affecting the bank account.