Exciting events in the world of accounting for FF programs

[simongr]

Before I start this can I point out THE SKY IS NOT FALLING IN. This is just interesting idle speculation. There has been a change in how businesses are required to account for customer loyalty programs as follows:

Interpretation 13 Customer Loyalty Programmes
Interpretation 13 was recently released by the Australian Accounting Standards Board. It is effective for annual financial periods commencing on or after 1 July 2008, i.e. for 30 June 2009 financial years.

It requires that the fair value of revenue be allocated between sales and rewards credits i.e. a portion of revenue will be deferred until the rewards have been redeemed. The deferred revenue is based on the fair value of the reward to the customer NOT the fair value of the cost of providing the reward. As there are no specific transitional provisions included in Interpretation 13, any change in accounting treatment comprises a change in accounting policy and you will be required to retrospectively restate your 30 June 2008 comparatives included in your 30 June 2009 financial statements.

Ok – now I know not all of you are accountants so this may not be of that much interest but bear with me. Companies often make operational decisions on not just a direct cash in vs. cash out basis but also on how the information is presented in their financial statements.

There are two interesting elements here – the deferring of revenue and the valuation of that deferral.

Ok so now if you buy a $10,000 ticket and earn 25,000 points – that basically gives you say 1½ return flights to Melbourne – say $500 worth of value. So QF now recognises $9,500 in its accounts and punts the other $500 into the future. The main change is that the value of this is based on the value to you rather than the cost to QF. You might argue that previously QF should only carry a liability for the additional cost of carrying you plus the profit lost by not carrying a revenue PAX. This increases the liabilities of QF if it still owns the FFP.

So now if QF sell QFF in theory they no longer have the liability – the FFP does – so this improves some ratios for QF. So obviously they will sell off the FFP as a result of this

S

 

[Standby]

agree I'm no accountant but I thought QF's move either last year or the year before to the new Int accounting standards was a trigger where FF points werent recognised as a debit on the accounts.So QF previously could sell points to CCs and show the rev in without identying the points held in QFFF points as a future liability.Anyway I'm sure that changed and QF had to take a hit on the points value with the accounting charge.So now they dont get their hands on the rev until the booking paid by the points has flown l.
I'm also sure QF only account for the points earned at some marginal cost of carriage rate...well below any published fare.
Either way a quick scan at the QF web site shows an increase of FF uptake
by about 100K pax from about 3.2M to 3.3M(the graph is a bit hard to read).
Given they havent grown much capacity in the last year it seems that desire to move the money from debit to credit has had an impact on the availability offered

 

[alect]

What effect, if any does the new accounting standard have on the payments between OW/partner airlines for the miles awarded to FF members of other airlines? Do they need to be treated and/or valued diferently now?

 

[simongr]

I would expect that not to change - that is a commercial pricing decision. However there might be agreements that dictate if the accounting treatment changes then the pricing might change - say if the sale price is the accounting valuation. I would not expect so.

Accountants - 24 hour party people

 

[Keith009]

*blank stare* :shock:

 

[dubno]

To misquote the late, great Bill Hicks:

I feel like a dog that's just been shown a card trick.




Is this why I have no money?

Cheers,

Dubno

 

[straitman]

:?: :?: :?: :?:

 

[Tooner]

As I'm definitely not an accountant I guess it just makes the stated earnings even more adrift from the cash flow.

While QF in Simongr's example receive $10,000 to cash, $500 doesn't go to revenue. But then QF uses the cash now - cheap funding. No wonder QAN has a lot of cash!

If they sell the FFP, doesn't that mean they then sell the points to FFP Ltd, and record cash and revenue? Then it is a matter of how they negotiate the value of points with FFP Ltd.

If they end up with less cash than they cuirrently get, they must then decide whether having a nice eps number under A-IFRS is more important than having cash.

Or, indeed, how they and their auditor interpret the ASB decision

 

[simongr]

If they end up with less cash than they cuirrently get, they must then decide whether having a nice eps number under A-IFRS is more important than having cash.

Or, indeed, how they and their auditor interpret the ASB decision

It depends on how the market measures them. My business is assessed on return on revenue rather than cash. That can make for some interesting business decisions...

 

[Tooner]

True. Given I work for a financial institution, IFRS has odd effects on our performance!

I'm in the middle of my Corporate Finance case study evil: ) so my focus is on cash at the moment.

Can I stress again: I am not an accountant