Accounting Theory
Case Study 10.2 Accounting for frequent flyer points: fact or fiction ?

Maylinda Irmayanti (023111146) Windy Ayu Wulandari (023111239)

Case Study 10.2 Accounting for frequent flyer points: fact or fiction?

Accounting requirements under IFRS have changed the way airlines account for frequent flyer points. In the past, the cost/provision approach accounting practices were used. Under this method, the upfront sale of points to bank, credit card companies, mortgage brokers, and general retailers was recorded as revenue in the income statement at the time of sale. The expense related to the sale, that is the cost of travel, was recorded at a later period, when the airline provided the travel service, or gave up the ‘free’ seat. The Australian Financial Review (AFR) reported in December 2004 that the sale of points to third parties, rather than giving them away to loyal customers, made the schemes profitable for Qantas and major network carriers in the United States and Europe. The newspaper claimed that when Qantas sought additional debt or equity capital, it would have to treat its frequent flyer point liability on the same basis as other global firm, in the name of equality and transparency. Qantas responded immediately to the AFR article. The company stated that it establishes a liability and takes a charge to the profit and loss account for the cost of providing a ‘free’ seat at the time the frequent flyer revenue was received, not when Qantas gives up the ‘free’ seat (the cost/provision approach). The company said it complies with Australian accounting standards and would comply with international accounting standards when they were introduced. It would not have to change its accounting practices when it next sought to raise capital. From 1 July 2008 Qantas must apply IFRIC 13 Customer Loyalty