Frequent Hazard Accounting

 Essay regarding Frequent Hazard Accounting

Introduction

Recurrent flyer devotion programs really are a valuable promotion for flight companies, however accounting for regular flyer items (FFPs) is usually not a straight forward process (Bowman 1995). The essence this job is to look at the concept of how FFPs should be accounted for according to the Framework, assess how Qantas Airways Limited (Qantas) and Virgin Green Holdings Limited (Virgin) be the cause of FFP's, and determine the actual consequences of numerous accounting remedies.

Accounting procedure for frequent flyer details according to the concepts of the Construction

The major accounting issue with FFPs is how an flight accounts for their particular economic worth (Bowman 1995). Although FFPs have a relatively low believed value of between US$0. 01 and US$0. 12 each, the top number of kms flown with a multitude or perhaps airline user's means that to any one airline FFPs can represent an important liability (WebFlyer 2006).

Because FFPs represent something special obligation intended for an aircarrier to provide consumers with air travel at a later date, they could be considered a liability (Bowman 1995, AASB 2004). The complexity in recording these liabilities originates from the fact the fact that liability needs to be estimated, while FFPs could be realised whenever before that they expire (IATA & KPMG 1995). When determined, these liabilities ought to be recorded because provisions, based on the estimation of potential liability, until the points will be redeemed. To further add to the intricacy of accounting for FFPs the liability provides the potential to end up being recorded as being a deferred incremental cost or perhaps deferred earnings (IATA & KPMG 1995).

The gradual cost way of accounting for FFPs consists of a supply being build based on predicted value of points that are going to be redeemed and the time of redemption, with the volume of the dotacion being based on the probably incremental expenses associated with the redemption of factors, ie meals, drinks, ticketing (IATA & KPMG 1995). The provision for the incremental costs are in that case recorded as being a liability, going to an price once the details have been redeemed.

The deferred income approach requires deferring a proportion of revenue in the sale of each ticket to take into account the FFPs (Virgin 2006). Similar to the gradual cost strategy, the amount that may be deferred is usually calculated employing assumptions as to what proportion of points could be redeemed (IATA & KPMG 1995). The deferred earnings amount is usually recognised as being a liability until the points are being used whereby it really is recognised because revenue (Virgin 2006).

The important difference between the two frequent flyer point accounting procedures is usually that the incremental price approach goodies customers flying under FFPs as being individual from the revenue process consequently only gradual costs are accounted for, while the deferred income approach acknowledges the link, completely recognising the significance (IATA & KPMG 1995). Qantas and Virgin offer a good example of airlines that use these two different approaches.

Qantas and Virgin mobile frequent flyer accounting

While Qantas markets FFPs to third parties along with providing them to customers, this accounts for FFPs in 2 different ways. The sale of points to businesses is recorded as deferred revenue, net of points that are categorized as not going to be redeemed (Qantas 2006). Income is only then simply recognised inside the Income Statement as net passenger earnings once the factors are redeemed (Qantas 2006). For those details Qantas views will not be redeemed, revenue can be recognised straight at the time of sale of points (Qantas 2006).

For FFPs earned by customers Qantas uses the incremental cost accounting approach (Qantas 2006). The obligation to provide travel later on is recognized as a legal responsibility based on the incremental costs associated with providing airtravel to the customer (Qantas 2006). A provision is established for these current and no current debts based on the modern day value from the incremental price...

References: Aussie Accounting Criteria Board, Structure for the preparation and Presentation of economic Satements, September 2004.

Bowman, L. 95. ‘Going the space ', Airfinance Journal, vol. 170, Feb, pp. twenty three – twenty-five.

IATA and KPMG, 1995, Airline accounting guideline number 2: frequent-flyer programme accounting. Montreal, Canada: International Air Transport Connection.

Tan, C. W., Structure, G., Hancock, P. and Taplin, 3rd there’s r. 2002, ‘Empires of the atmosphere: determinants of global airlines ' accounting-policy choices. ' Intercontinental Journal of Accounting, volume. 37, pp 277-299.

Qantas Airways Limited, 2006, Focus on detail, twelve-monthly report 06\, Qantas Airways, Mascot.

Virgin Blue Coalition Limited. (2006), Annual Survey 2006, Virgin mobile Blue, Brisbane.

WebFlyer (2006). ‘Chronology of Mileage Redemption/Program Liability Build up '. [Online], Readily available from: < (http://www.webflyer.com/company/press_room/facts_and_stats/liability_accumulation.php>, [8 August 2006].

Wikipedia. (4 August 2006). ‘Frequent flyer program '. [Online]. Available from:, [8 Oct 2006].

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