Frequent Flyer Accounting
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's, 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 …show more content…
In contrast, the incremental cost approach is to designed to maximise profitability and minimise provisioning levels however to achieve this there are stringent conditions which need to be met. An airline using the incremental cost approach needs to be able to prove that flights flown by frequent flyers represent excess capacity and are incidental to the normal business of flying passengers (IAST KPMG 2005).
Investors need to be aware of both approaches to FFPs accounting as comparing two airlines using different approaches could result in incorrect interpretations of which one is performing better financially. For customers looking at joining a frequent flyer program it would also be useful to consider which accounting procedure is used as an airline using the deferred revenue approach would be able to provide frequent flyer seats on any trip at any time while the airline using the incremental cost approach can only provide access to seats that represent excess capacity.
Accounting for FFPs is an involved process with two main approaches being used, the incremental cost approach and the deferred revenue approach. Both procedures can be seen as legitimate ways for accounting for FFPs but impact the financial statements of a company in different ways. Investors and customers wanting to join a frequent flyer program should