Accounting for Frequent Flier Essay

8707 Words Oct 9th, 2012 35 Pages
ACCOUNTING FOR AIRLINE FREQUENT FLYER PROGRAMS: MANAGEMENT INCENTIVES AND FINANCIAL REPORTING IMPACTS May 2012
Brian J. Franklin, BBA Accounting ‘12, College of Business and Public Policy, University of Alaska Anchorage, 3211 Providence Drive, Anchorage, AK 99508, 907-268-4233 Ext. 401, bfranklin@frontiertutoring.com

ABSTRACT The obligation to provide free or reduced-fare travel to passengers who redeem their accrued frequent flyer program (FFP) benefits represents a significant liability on every major U.S. airline’s balance sheet. Major U.S. airlines employ one of two methods to account for the liabilities they incur when issuing mileage credits to traveling passengers. The Deferred Revenue Method recognizes a liability for the fair
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Reporting FFP liabilities under fair value, however, has resulted in some airlines’ FFP liabilities increasing dramatically. For example, when Delta Air Lines chose to revalue its FFP under the Deferred Revenue Method following its Chapter 11 reorganization and subsequent fresh start accounting, its FFP liability increased from $412 million to $2.4 billion. Specific management incentives are associated with the adoption and use of each accounting method, and the FFP accounting method chosen by a given airline can potentially drive the way management operates its FFP, including the relative amount of award seats it makes available. Additionally, the Deferred Revenue Method in particular provides opportunities to manage reported earnings through FFP-related accounts. The goal of this thesis project is to examine and answer the following central question: In the context of investors’ informational needs, what are the circumstances under which the Deferred Revenue Method is preferable to the Incremental Cost Method of accounting for FFP liabilities? FACULTY ADVISORS
C. Patrick Fort, Professor of Accounting, College of Business and Public Policy, University of Alaska Anchorage, 3211 Providence Drive, Anchorage, AK 99508, 907-786-4138, cpfort@uaa.alaska.edu Kevin E. Dow, Assistant Professor of Accounting, College of Business and Public Policy, University of Alaska Anchorage, 3211 Providence

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