Jet: appreciating through depreciation

Updated: Jul 31 2008, 06:01am hrs
Jet Airways has accounted Rs 915.48 crore in its exceptional items due to change in the depreciation method, which has given a healthier picture to its net profit (Rs 143 crore for the June quarter).The company changed its depreciation method from written down value (WDV) to straight line method (SLM) for its narrow body aircraft (NBA) only. In SLM, the rate is charged on the historical cost, while for WDV, it is calculated on the net book value as on date. Ideally, depreciation rate (for both the methods), which is calculated taking into account a fixed period, would result into the same book value for both the methods at the end of the considered period.

However, since SLM constitutes historical price and WDV book value of the asset as of date, there is a higher depreciation rate for WDV and hence lower for SLM. Also, the depreciated amount over the life of the asset is higher in the first few years for WDV, while in case of SLM it is same over the years.

On the other hand, for the latter part of the period considered of a fixed asset, the depreciation amount for WDV would be lower and for SLM it would be higher. This methodology would have been followed in case of Jet Airways, which would result in a comparatively lower depreciation after switching to SLM. If one excludes exceptional items, the company is once again in net loss, which amounts to Rs 772.49 crore. It must be noted that narrow body aircraft constitutes 65 of the total 85 aircrafts and majority of the 65 aircrafts is company-owned and hence accounted for depreciation. This could be one of the reasons which has resulted in a higher amount of reversal (the amount resulted due to switching to SLM).

Contributed by Rahul Jain