2.Change in Accounting Principle

The Company previously adopted the direct expensing method under Financial Accounting Standards Board (“FASB”) ASC 908, formerly FASB Staff Position AUG AIR-1, Accounting for Planned Major Maintenance Activities (“FSP AUG AIR-1”) on January 1, 2007. Under FSP AUG AIR-1, non-refundable maintenance reserves were recorded as maintenance reserves revenue (assuming cash was received or collection was reasonably assured), and associated maintenance work was recorded as maintenance expense when the work was performed. During the first quarter of 2014, the Company evaluated its method of accounting for maintenance reserves and lessor maintenance obligations and elected to change its method of accounting to:

(i) Recognize non-refundable maintenance reserves as liabilities for deposits against future maintenance reimbursements of maintenance reserves received in the normal course of ongoing leases;

(ii) Recognize reimbursements from such collected reserves as disbursements against the liability when claims are submitted for payment against previously collected maintenance reserves;

(iii) Reflect as liabilities non-refundable reserves received by the prior lessor upon acquisition of an aircraft, which are claimable by the lessee when maintenance is performed;

(iv) Recognize as income non-refundable reserves not refunded to lessees upon termination of the lease and return of the aircraft to the Company in accordance with all lease return requirements; and

(v) Record lessor maintenance obligations as liabilities upon acquisition of an aircraft subject to a lease under which the Company assumes the prior lessor’s obligation to pay a portion of a first-time maintenance event.

In management’s judgment, the change to this accounting method is preferable in that it will provide the user of the Company’s financial statements a better understanding of the underlying business terms of the Company’s leasing transactions and provide additional clarity with respect to the Company’s sources of income, its non-refundable reserve obligations, and its lessor maintenance obligations. The Company has applied the change in method of accounting for maintenance reserves and lessor maintenance obligations to all prior periods presented within the financial statements in accordance with accounting principles relating to accounting changes. The change in accounting principle resulted in a cumulative net decrease of $8,088,200 in stockholders’ equity as of January 1, 2013.

The effects on the Company’s balance sheet at December 31, 2013 as a result of the retroactive application of the change in accounting principle in accordance with ASC 250 were as follows:

	December 31, 2013
	As reported previously			As adjusted			Effect of change
Cash and cash equivalents	$	2,112,700		$	2,112,700		$	-
Accounts receivable, net		3,313,700			3,303,800			(9,900	)
Finance leases receivable		1,895,200			1,895,200			-
Aircraft and aircraft engines held for lease, net		152,375,200			152,954,600			579,400
Assets held for sale		735,000			735,000			-
Prepaid expenses and other		3,633,000			3,633,000			-
Total assets	$	164,064,800		$	164,634,300		$	569,500
Accounts payable and accrued expenses	$	1,175,300		$	1,202,700		$	27,400
Notes payable and accrued interest		77,527,300			77,527,300			-
Maintenance reserves and accrued maintenance costs		13,254,100			18,283,900			5,029,800
Security deposits		6,265,000			6,265,000			-
Unearned revenues		646,700			646,700			-
Deferred income taxes		16,099,700			14,573,800			(1,525,900	)
Total liabilities		114,968,100			118,499,400			3,531,300
Preferred stock		-			-			-
Common stock		1,600			1,600			-
Paid-in capital		14,780,100			14,780,100			-
Retained earnings		34,819,100			31,857,300			(2,961,800	)
Treasury stock		(504,100	)		(504,100	)		-
Total stockholders’ equity		49,096,700			46,134,900			(2,961,800	)
Total liabilities and stockholders’ equity	$	164,064,800		$	164,634,300		$	569,500

The effects on the Company’s statement of operations for the year ended December 31, 2013 as a result of the retroactive application of the change in accounting principle in accordance with ASC 250 were as follows:

	For the Year Ended December 31, 2013
	As reported previously		As adjusted		Effect of change
	As reported previously		As adjusted		Effect of change


Operating lease revenue, net	$	18,794,200	$	18,794,200	$	-
Maintenance reserves income, net		8,878,300		14,910,400		6,032,100
Gain on disposal of assets and other income		4,527,000		4,527,000		-
		32,199,500		38,231,600		6,032,100

Maintenance		8,765,000		6,962,400		(1,802,600	)
Depreciation		7,312,500		7,363,100		50,600
Management fees		4,352,400		4,369,300		16,900
Interest		4,075,000		4,075,000		-
Professional fees, general and administrative and other		1,532,100		1,532,100		-
Insurance		1,166,400		1,166,400		-
Other taxes		90,200		90,200		-
		27,293,600		25,558,500		(1,735,100	)

Income before taxes		4,905,900		12,673,100		7,767,200
Tax provision		1,688,400		4,329,200		2,640,800
Net income	$	3,217,500	$	8,343,900	$	5,126,400
Earnings per share:
Basic	$	2.08	$	5.41	$	3.33
Diluted	$	2.03	$	5.26	$	3.23

The effects on the Company’s statement of cash flows for the year ended December 31, 2013 as a result of the retroactive application of the change in accounting principle in accordance with ASC 250 were as follows:

	For the Year Ended December 31, 2013
	As reported previously			As adjusted			Effect of change
Operating activities:
Net income	$	3,217,500		$	8,343,900		$	5,126,400
Adjustments to reconcile net income to net cash provided by operating activities:
Net gain on disposal of assets		(3,808,200	)		(3,808,200	)		-
Depreciation		7,312,500			7,363,100			50,600
Non-cash interest		1,113,600			1,113,600			-
Deferred income taxes		1,680,500			4,321,300			2,640,800
Changes in operating assets and liabilities:
Accounts receivable		(106,000	)		(96,100	)		9,900
Finance lease receivable		246,000			246,000			-
Income taxes receivable		2,000			2,000			-
Prepaid expenses and other		(772,400	)		(772,400	)		-
Accounts payable and accrued expenses		(40,300	)		(23,400	)		16,900
Accrued interest on notes payable		(38,400	)		(38,400	)		-
Maintenance reserves and accrued costs		(1,284,200	)		(9,128,800	)		(7,844,600	)
Security deposits		(525,200	)		(525,200	)		-
Unearned revenue		(105,700	)		(105,700	)		-
Income taxes payable		(19,100	)		(19,100	)		-
Net cash provided by operating activities		6,872,600			6,872,600			-
Investing activities:
Proceeds from sale of aircraft and aircraft engines held for lease, net of re-sale fees		10,018,700			10,018,700			-
Proceeds from sale of assets held for sale, net of re-sale fees		945,100			945,100			-
Purchases of aircraft and aircraft engines		(24,965,500	)		(24,965,500	)		-
Net cash used in investing activities		(14,001,700	)		(14,001,700	)		-
Financing activities:
Borrowings under Credit Facility		19,000,000			19,000,000			-
Repayments of Credit Facility		(9,300,000	)		(9,300,000	)		-
Debt issuance costs		(2,055,000	)		(2,055,000	)		-
Net cash provided by financing activities		7,645,000			7,645,000			-
Net increase in cash and cash equivalents		515,900			515,900			-
Cash and cash equivalents, beginning of year		1,596,800			1,596,800			-
Cash and cash equivalents, end of year	$	2,112,700		$	2,112,700		$	-