Author Archives: MAURO

Because of the industry low margins, revenue recognition is one of the most critical accounting policies for airlines. This publication from KPMG discusses some key accounting considerations for revenue recognition policies in the airline industry. Even though the publication focus on IFRS/IAS standards, I think that the issues discussed offer insights equally applicable to GAAP standards.

Specifically, the KPMG paper examines more closely five issues: recognition of unredeemed tickets, treatment of trade discounts and commissions, taxes and airport charges, fuel surcharges, financial statement disclosures.

Unredeemed tickets

Part of the tickets sold by airlines can have lives of one year or more, or may be specific to flight and if not used cannot be refunded. For these tickets, airlines companies decide about the timing as to when recognise the revenue based on statistical data. Assumptions are therefore very critical and can have significant impacts on financial results. Another critical area is related to non refundable tickets, especially for low cost companies. In this cases, revenue are often recognised when the airlines close the flight, meaning that the flight is completely booked.

Commission and discounts

The second issue discussed is related to commission and discounts for travel agencies, which still account for a large proportion of airline industry ticket sales. Discounts, which are offered as an incentive to encourage the purchase of tickets, should be recognised as a reduction of the gross revenue. Commissions to agencies however should be recognised as an expense at the same time as the revenue to which commissions are related are recognised.

Taxes and airport charges

When tickets are sold, airlines companies act as collectors of taxes on behalf of governments. Amounts received from customers have to be distinguished between amounts for airline services and amounts for third parties (governments or airports). Additionally, taxes and airport charges should be accounted as a payable in the liabilities of the balance sheet and therefore should be excluded from the amounts collected from passenger revenue.

Fuel surcharges

Due to the recent continuous increases and fluctuations on the oil prices, many airlines companies have decided to add fuel surcharges to the tickets price, in order to minimise the impacts of the oil price. Fuel surcharges are a component of the ticket fare and they are recognised as revenue at the time when the passenger flies.

Disclosures

Finally, disclosures on financial statements are very important in order to analyse financial statements, Usually, the types of disclosures that appear on financial statements are:

• Definition of Revenue;
• Timing of Revenue Recognition;
• Where in the Income Statements commissions are recognised;
• Revenue Recognition basis for unredeemed tickets;
• Amount of Revenue net of discounts;
• Amount of deferred income or unearned revenue.

As shown in the summary of KPMG publication, recognition policies of revenue/expenses are critical to analyse financial statements of airlines companies. In fact, adoption of different policies can have deep impacts on accounting, financial and managerial performances. Therefore, it is better to fully understand policies adopted by companies in order to compare and analyse companies’ results.

Here you guys the link:

http://www.kpmg.com/Global/en/IssuesAndInsights/ArticlesPublications/Documents/recognition-of-revenue.pdf