Acco

In: Business and Management

Submitted By drsergiop
Words 8704
Pages 35
unting for an ACCOUNTING FOR AIRLINE FREQUENT FLYER PROGRAMS: MANAGEMENT INCENTIVES AND FINANCIAL REPORTING IMPACTS May 2012
Brian J. Franklin, BBA Accounting ‘12, College of Business and Public Policy, University of Alaska Anchorage, 3211 Providence Drive, Anchorage, AK 99508, 907-268-4233 Ext. 401, bfranklin@frontiertutoring.com

ABSTRACT The obligation to provide free or reduced-fare travel to passengers who redeem their accrued frequent flyer program (FFP) benefits represents a significant liability on every major U.S. airline’s balance sheet. Major U.S. airlines employ one of two methods to account for the liabilities they incur when issuing mileage credits to traveling passengers. The Deferred Revenue Method recognizes a liability for the fair value of the outstanding mileage credits (with “fair value” defined under International Financial Reporting Standards (IFRS) as “the amount for which the award credits could be sold separately”). The Incremental Cost Method recognizes a liability for the marginal cost of providing air transportation to eligible award passengers (i.e. the cost of taxes, fuel, food, etc. to fly one additional passenger on a seat that otherwise would have been empty—generally a nominal amount). Incremental cost accounting for FFPs has been subject to increasing scrutiny over time. In the last several years airlines have reduced seating capacity due to high fuel prices and weak demand during the global economic recession, which has caused flights to be fuller and has increased the chance that, for any given seat, a passenger flying on redeemed frequent flyer miles could displace a fare-paying passenger. The Incremental Cost Method does not account for the opportunity cost (i.e. the cash revenue foregone) associated with such a displacement. The U.S. Financial Accounting Standards Board (FASB) considered, but never reached authoritative…...

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