Frequent Flyer Accounting
Introduction
Frequent flyer loyalty programs are a valuable marketing tool for airlines, however accounting for frequent flyer points (FFPs) is not a straight forward process (Bowman 1995). The aim of this assignment is to examine the concept of how FFPs should be accounted for according to the Framework, compare how Qantas Airways Limited (Qantas) and Virgin Blue Holdings Limited (Virgin) account for FFP's, and determine the potential consequences of different accounting treatments.
Accounting procedure for frequent flyer points according to the principles of the Framework
The major accounting issue with FFPs is how an airline accounts for their economic value (Bowman 1995). Although FFPs have a relatively low estimated value of between US$0.01 and US$0.10 each, the large number of kilometres flown by a multitude or airline customer's means that to any one airline FFPs can represent a significant liability (WebFlyer 2006).
Because FFPs represent a present obligation for an airline to provide customers with air travel at a later date, they can be considered a liability (Bowman 1995, AASB 2004). The complexity in recording these liabilities comes from the fact that the liability has to be estimated, as FFPs can be realised any time before they expire (IATA & KPMG 1995). Once determined, these liabilities should be recorded as provisions, based on the estimation of potential liability, until the points are redeemed. To further add to the complexity of accounting for FFPs the liability has the potential to be recorded as a deferred incremental cost or deferred revenue (IATA & KPMG 1995).
The incremental cost approach to accounting for FFPs involves a provision being set up based on estimated value of points that are going to be redeemed and the timing of redemption, with the amount of the provision being based on the likely incremental costs associated with the redemption of points, ie meal, drinks, ticketing (IATA & KPMG 1995). The provision
Frequent flyer loyalty programs are a valuable marketing tool for airlines, however accounting for frequent flyer points (FFPs) is not a straight forward process (Bowman 1995). The aim of this assignment is to examine the concept of how FFPs should be accounted for according to the Framework, compare how Qantas Airways Limited (Qantas) and Virgin Blue Holdings Limited (Virgin) account for FFP's, and determine the potential consequences of different accounting treatments.
Accounting procedure for frequent flyer points according to the principles of the Framework
The major accounting issue with FFPs is how an airline accounts for their economic value (Bowman 1995). Although FFPs have a relatively low estimated value of between US$0.01 and US$0.10 each, the large number of kilometres flown by a multitude or airline customer's means that to any one airline FFPs can represent a significant liability (WebFlyer 2006).
Because FFPs represent a present obligation for an airline to provide customers with air travel at a later date, they can be considered a liability (Bowman 1995, AASB 2004). The complexity in recording these liabilities comes from the fact that the liability has to be estimated, as FFPs can be realised any time before they expire (IATA & KPMG 1995). Once determined, these liabilities should be recorded as provisions, based on the estimation of potential liability, until the points are redeemed. To further add to the complexity of accounting for FFPs the liability has the potential to be recorded as a deferred incremental cost or deferred revenue (IATA & KPMG 1995).
The incremental cost approach to accounting for FFPs involves a provision being set up based on estimated value of points that are going to be redeemed and the timing of redemption, with the amount of the provision being based on the likely incremental costs associated with the redemption of points, ie meal, drinks, ticketing (IATA & KPMG 1995). The provision
References: Australian Accounting Standards Board, Framework for the preparation and Presentation of Financial Satements, July 2004. Bowman, L. 1995. ‘Going the distance ', Airfinance Journal, vol. 170, Feb, pp. 23 – 25. IATA and KPMG, 1995, Airline accounting guideline no. 2: frequent-flyer programme accounting. Montreal, Canada: International Air Transport Association. Tan, C.W., Tower, G., Hancock, P. and Taplin, R. 2002, ‘Empires of the sky: determinants of global airlines ' accounting-policy choices. ' International Journal of Accounting, vol.37, pp 277-299. Qantas Airways Limited, 2006, Attention to detail, annual report 2006, Qantas Airways, Mascot. Virgin Blue Holdings Limited. (2006), Annual Report 2006, Virgin Blue, Brisbane. WebFlyer (2006). ‘Chronology of Mileage Redemption/Program Liability Accumulation '. [Online], Available from: <(http://www.webflyer.com/company/press_room/facts_and_stats/liability_accumulation.php>, [8 October 2006]. Wikipedia. (4 October 2006). ‘Frequent flyer program '. [Online]. Available from: <http://en.wikipedia.org/wiki/Frequent_flyer_program>, [8 October 2006].