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Case Study 10 Godfrey

905 words - 4 pages

Accounting Theory
Case Study 10.2 Accounting for frequent flyer points: fact or fiction ?

Maylinda Irmayanti (023111146)
Windy Ayu Wulandari (023111239)

Case Study 10.2 Accounting for frequent flyer points: fact or fiction?

Accounting requirements under IFRS have changed the way airlines account for frequent flyer points. In the past, the cost/provision approach accounting practices were used. Under this method, the upfront sale of points to bank, credit card companies, mortgage brokers, and general retailers was recorded as revenue in the income statement at the time of sale. The expense related to the sale, that is the cost of travel, was ...view middle of the document...

The interpretation applies to the recognition and measurement of obligations to supply goods and services to customers if they redeem ‘award’ points. IFRIC 13 requires the deffered revenue approach. Building on IAS 18 paragraph 3, the interpretation views awards granted as separately identifiable components of an initial transaction )in Qantas’s case, the sale of an airline ticket). The ticket sale is split into two components, the provision of service and the associated award. The revenue allocated to the award is deffered and recognised when the award is redeemed. The award is to be measured at fair value and measurement guidance is included in the interpretation.

1. Describe the accounting process used to account for frequent flyer points prior to the adoption of IFRS. How was the matching principle breached by this practice?

Revenue was recorded when points were sold. An expense (the cost of the FF seat) was not recorded at the same time. This was recorded later when travel occurred. The matching principle was breached by early recognition of revenue, without a corresponding increase in expense (‘cost of goods sold’ or cost of ticket given away).

2. How could companies benefit from this accounting practice? Consider both the short and long term.

In the short term, the accounting policy of recognising revenue immediately while deferring the FF expense to a later period allows a company to report more revenue and greater profit. However, in the long term there is no benefit as earnings will be reduced by the expense in later years.

Presumably companies are concerned about looking good in the short term. Perhaps they are hoping business will improve, so that the deferred expense has relatively lesser impact when it is recognised in the later period.

3. Why was Qantas keen to correct the errors reported in the AFR...

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