Unlock document.
This document is partially blurred.
Unlock all pages and 1 million more documents.
Get Access
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, 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 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 for the incremental costs are then recorded as a liability, moving to an
expense once the points have been redeemed.
The deferred revenue approach involves deferring a proportion of revenue from the sale of
each ticket to account for the FFPs (Virgin 2006). Similar to the incremental cost approach,
the amount that is deferred is calculated using assumptions as to what proportion of points
are likely to be redeemed (IATA & KPMG 1995). The deferred revenue amount is
recognised as a liability untilthe points are used whereby it is recognised as revenue
(Virgin 2006).
The important distinction between both frequent flyer point accounting procedures is that
