Accounting for Airlines: Should Airline Recognize any Asset or Liability at the time it places order?

Accounting for Airlines :

(a) Under the Conceptual Framework, the airline should not recognize any asset or liability at the time it place the order, because the transaction has not taken place. Accounting recognizes purchase transactions when delivery takes place, and title passes. At this point the airline, and not the manufacturer, has assumed the risks and rewards of owning the airplane.

Nonetheless, the airline has made an important and irrevocable commitment. Generally, major capital spending commitments are disclosed in the notes to the financial statements.

(b)The airline is better off for having locked in the price than if it had not done so. Conversely, if the price had fallen, it would be worse off for having signed the non-cancellable fixed price order. Nonetheless, under current accounting standards, such gains and losses are not recognized.

Accounting treats commitments to purchase financial assets differently from commitments to purchase property. If the airline had agreed to purchase a foreign currency at a fixed price for delivery at a future date, and the exchange rate goes up or down, it is required to recognize a gain or loss.