Recognition of Revenue in the Global Airline Industry TRANSPORT

Transcription

1 Recognition of Revenue in the Global Airline Industry TRANSPORT

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3 Introduction 3 Passenger and freight revenue 4 Unredeemed tickets 6 Commission and discounts 7 Taxes and airport passenger charges 8 Fuel surcharges 9 Disclosures 10 Glossary 11

4 2 Recognition of Revenue in the Global Airline Industry

5 Recognition of Revenue in the Global Airline Industry 3 Introduction Passenger revenues are currently at historic highs, with loads and yields growing concurrently in many regions. These buoyant times still require a focus on the accounting for passenger revenue as even with the new technology in revenue systems and the growth in e-ticket sales, significant estimation is still required. Revenue recognition is perhaps one of the most critical accounting policies for all airlines given the industry generally generates thin profit margins. Airline revenue recognition policies extend from core passenger and freight revenue to policies for complex passenger loyalty programs. This publication discusses key considerations in accounting for policies relating to passenger and freight revenue recognition for airlines. The principal objective of this publication is to outline accounting issues in revenue recognition under International Financial Reporting Standards (IFRS). The treatment of passenger and freight revenue in financial statements is generally consistent throughout the industry; as a result this publication covers both aspects of revenue without differentiating unless reference is made. The basic principle that revenue should be recognised when transportation or carriage is provided is well established. This concept is the same whether revenue is passenger or freight. The following issues are examined more closely in this publication: the basis of recognition of unredeemed tickets the treatment of standard and volume incentive commissions and trade discounts taxes and airport passenger charges fuel surcharges. For users of airline financial statements, the differing accounting treatment of the issues referred to above can make the comparison of airline financial performance difficult. It is in this context that KPMG has summarised a variety of aspects of accounting policy and industry practice concerning revenue recognition. The International Accounting Standards Board (IASB) and the U.S. Financial Accounting Standards Board (FASB) are working on a joint project, the objective of which is to develop a comprehensive set of principles for revenue recognition. The resulting standard would replace IAS 18 Revenue and IAS 11 Construction Contracts. The project is in its early stages, and a discussion paper is expected in the fourth quarter of Loyalty scheme accounting has not been addressed in this publication as the International Financial Reporting Interpretations Committee ( IFRIC ) in May 2007 decided to proceed to finalise the draft Interpretation D20 Customer Loyalty Programs which will fundamentally change the approach to accounting for airline loyalty schemes. Having regard to the above, this publication concentrates on the currently enacted accounting standards, and has not sought to address potential future developments.

6 4 Recognition of Revenue in the Global Airline Industry Passenger and freight revenue Revenue is defined by IAS 18 paragraph 7 and 8 as the gross inflow of economic benefits during the period arising in the course of the ordinary activities of an enterprise when those inflows result in increases in equity, other than increases relating to contributions from equity participants. Revenue includes only gross inflows of economic benefits received and receivable by the enterprise on its own account. IAS 18 Revenue paragraph 20 states that revenue from service transactions should be recognised when: it is probable that the economic benefits of the transaction will flow to the entity the revenue can be measured reliably the stage of completion can be measured reliably the associated costs (both incurred to date and expected future costs to complete) from rendering this service are identified and can be measured reliably. Revenue is measured at the fair value of the consideration received, taking into account any trade discounts and volume rebates. The amount of revenue recognised is discounted to the present value of consideration due if payment extends beyond normal credit terms. Airline passenger tickets (paper or e-tickets) or freight airway bills are usually issued in advance of the service/transportation departure date. This requires unearned revenue to be recognised when the ticket or airway bill is sold. The general accounting practice for passenger and freight revenue recognition is that revenue received is deferred and classified as a liability on the balance sheet until the passenger or freight is uplifted (i.e. service provided), at which time revenue is recognised in profit and loss. This recognition principle requires airlines to develop assumptions to determine when to recognise unavailed revenue relating to tickets not lifted at the anticipated

7 Recognition of Revenue in the Global Airline Industry 5 date of travel. This is discussed in more detail in 'unredeemed tickets' on page 6 of this publication. The financial statements of airlines highlight key assumptions and judgements which impact passenger and freight revenue recognition. These include determining: when and how unavailed revenue recognised on the balance sheet should be released to profit and loss the amount of expenses to be netted against revenues rather than being recognised as a cost of sale the disclosure of changes in customer behaviour or ticket conditions between reporting periods which result in one-off amounts of revenue being recognised. In practical terms, implementation of an appropriate revenue recognition accounting policy and underlying methodology will be dependent on available historical data, sophistication of revenue accounting systems and the availability of data to determine dates of tickets that are never redeemed. For example, whether unreedemed ticket data is available by ticket type, route (leisure routes may have different breakage rates than business routes) and interline tickets (where a passenger ticket is sold by one airline but the passenger is flown by another airline). Airline accounting policies show that methods vary from detailed statistical and historical trend analysis to time based recognition. In either instance, the underlying ticket terms and conditions are key in determining an appropriate accounting policy. e-ticketing is on the increase and this will help simplify some of the revenue recognition issues as the matching of paper tickets returned to a revenue accounting department will not be required. With the industry looking to move to 100 percent e-ticket in 2008, this should lead to airlines reviewing estimation techniques when recognising unredeemed tickets given the improved information flows.

8 6 Recognition of Revenue in the Global Airline Industry Unredeemed tickets Passenger tickets sold may be used for differing periods depending upon the conditions of sale and the type of fare purchased; thus they may for example have lives of one year or more or may be specific to particular flights and if not used cannot be returned and refunded. Some tickets sold will therefore never be used although, for many of those, that fact may not become apparent for an extended period or time. The timing as to when to recognise revenue for unredeemed tickets will depend upon the ability of the airline to rely upon historical statistics and data as well as the ticket conditions. Judgements and assumptions underpinning estimates of when to recognise unavailed revenue can have a significant impact on results. It is for this reason for example, the majority of U.S. airlines disclose this as an area of significant judgement in their financial statements. Limited refundable and exchangeable tickets Many airlines issue tickets that are refundable or exchangeable within specific time limits (these are incorporated into the terms and conditions). Thus, these tickets can be considered 'limited refundable'. Airlines usually account for limited refundable and exchangeable unredeemed tickets by writing back to revenue the ticket value between 6 to 24 months after the booked date of travel has lapsed as it is considered unlikely that any material volume of tickets will still be redeemed or the time limits on refund or transfer have expired. In the absence of accurate historical statistics and data, a write back period of 18 to 24 months from the date of sale appears to be the longest period that unredeemed tickets are recognised over. Non refundable and non exchangeable tickets Many low cost carriers issue significant proportions of tickets that are not refundable or exchangeable for another flight either prior to or after the booked date of travel. They often have relatively uncomplicated revenue accounting systems and this, along with these carriers not participating in interline arrangements, can significantly simplify revenue accounting. As a consequence, these airlines can often 'close' a flight and process the revenue the same day, making revenue estimation straight forward as the ticket revenue is recognised on the same date the flight is closed. Refundable and exchangeable tickets The terms and conditions of the tickets, as well as the relevant framework under which the ticket as issued, requires consideration to determine whether the unavailed revenue can be recognised along the principles of the limited refundable and exchangeable tickets or whether the liability must remain until expiry of any refund time limit.

9 Recognition of Revenue in the Global Airline Industry 7 Commission and discounts Even with the increasing use of booking tickets directly on-line airlines websites, a large proportion of airline industry ticket sales are still generated through travel agents, which charge the airlines a commission for their services. The offering of discounts or other reductions as part of the airline s competitive position is also prevalent in the industry. Discounts and rebates on sales are given as incentives to encourage the purchase of tickets (or the carriage of cargo); they are in effect reductions in the selling price of services rendered. The rebate or discount should be recognised as a reduction in revenue as the sales are recognised. The resulting net amount comprises the turnover/revenue of the airline. This is inline with IAS 18 paragraph 10 which details that revenue is recognised after taking into account the amount of any discounts or rebates allowed by the entity. Commissions to agents are provided as an incentive to sell fares on a particular airline and are accounted for by an airline under IAS 18, as an expense at the same time as the revenue to which they relate or when the commission becomes a liability.

10 8 Recognition of Revenue in the Global Airline Industry Taxes and airport passenger charges Taxes and airport passenger charges are levied in many countries. The airlines in effect act as collectors on behalf of national or local governments or airports. As per IAS 18 it is necessary to distinguish between amounts received from customers in exchange for goods or services provided to them, and amounts received on behalf of third parties from customers. Amounts received on behalf of third parties (e.g. national/local governments or airports) should be accounted for as a payable in the balance sheet until settled and should not gross up revenue and expenses (e.g. sales taxes and airport passenger charges). Most airlines deal with these taxes through the balance sheet, thus excluding the amounts collected from passenger revenue. As a result of limitations with industry flight reservations and interline systems, it is difficult for airlines to reconcile taxes/levies collected to taxes paid on tickets and tickets uplifted. As such, a detailed and regular analysis of uplift based taxes and levies deferred on the balance sheet is required to determine an appropriate basis to recognise, as revenue, amounts collected from passengers that are not expected to be uplifted, and hence the taxes not payable. Whilst an accounting policy of recording expenses either net or gross (at the point of recognising the associated revenue), does not impact the net profit or loss, it may impact non-gaap financial performance measures such as unit cost per seat mile ratios that receive close attention from analysts and finance providers.

11 Recognition of Revenue in the Global Airline Industry 9 Fuel surcharges In recent years, many airlines have introduced fuel surcharges to minimise the impact of raising fuel prices. These surcharges are not mandated, nor do they generally require regulatory approval. Fuel surcharges represent a component of the fare charged by the airline and are normally recognised as revenue when the passenger or freight is flown.

12 10 Recognition of Revenue in the Global Airline Industry Disclosures The following types of disclosures relating to revenue appear in the annual financial statements of airlines: definition of revenue - that it comprises passenger and freight revenue, net of discounts, and other revenue when revenue is recognise i.e. when transportation service is provided the basis on which unredeemed tickets are recognised as revenue the basis upon which taxes and charges are recognised the total amount of revenue net of discounts the amount carried in the balance sheet as deferred income or liabilities in respect of unearned revenue. There are a variety of disclosures dealing with accounting for unavailed revenue. The U.S. airlines surveyed in KPMG s Disclosure Handbook in 2006 state that they recognise unavailed revenue based on estimates that are underpinned by historic trends, adjusting for ticket usage patterns, refunds, exchanges and inter-line adjustments. Generally, other airlines state only that unavailed revenue is recognised on a systematic basis. where in the income statement commissions are recognised and disclosed

13 Recognition of Revenue in the Global Airline Industry 11 Glossary Passenger revenue scheduled and charter revenue from passengers. Freight revenue all forms of cargo revenue derived from air freight or trucking. Unearned revenue income arising from sales made where the sale coupon has been processed, but the flight is yet to take place. Also referred to as unavailed revenue, air traffic liabilities, forward sales and sales in advance of carriage. Discounts reductions to gross revenue, offered by the airline in order to gain competitive advantage. Commission agents standard commissions and all volume incentive commissions payable to agents.

14 KPMG s Global Airline practice contacts Martin Sheppard Australia Head of Aviation msheppard@kpmg.com.au Dr Ashley Steel United Kingdom Global Chair Transport ashley.steel@kpmg.co.uk Argentina Norbeto Cors ncors@kpmg.com Brazil Manuel Fernandes mfernandes@kpmg.com Canada Steve Beatty sbeatty@kpmg.ca Egypt Hossam Fahmy hfahmy@kpmg.com Finland Solveig Tornroos-Huhtamaki solveig.tornroos-huhtamaki@kpmg.fi France Philippe Arnaud parnaud@kpmg.com Germany Ulrich Maas umaas@kpmg.com Hong Kong Andrew Weir andrew.weir@kpmg.com.hk Hungary Andrea Sartori andreasartori@kpmg.com Ireland Sean O Keefe sean.okeefe@kpmg.ie Italy Marco Giordano mgiordano@kpmg.it Japan Toshio Ikeda toshio.ikeda@jp.kpmg.com Korea Peter C Kim pckim@kpmg.com Mexico Hector A Ramirez hramirez@kpmg.com Netherlands Herman van Meel vanmeel.herman@kpmg.nl New Zealand Paul Herrod pherrod@kpmg.com Norway Aage Seldal aage.seldal@kpmg.no Peru Jessica Oblitas joblitas@kpmg.com Russia Richard Glasspool richardglasspool@kpmg.com Singapore Wah Yeow Tan wahyeowtan@kpmg.com.sg South Africa Tshidi Mokgabudi tshidi.mokgabudi@kpmg.com.za Spain Miguel Angel Ibanez maibanez@kpmg.es Sweden Roland Nilsson roland.nilsson@kpmg.se Switzerland Roger Neininger rneininger@kpmg.com Taiwan Beryl Lin beryllin@kpmg.com.tw Thailand John Sim Jsim3@kpmg.com United States Chris Xystros cmxystros@kpmg.com

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