Question

United Continental Holdings Inc. is the parent company of both United Airlines and Continental Airlines. On the 12/31/2012 balance sheet the company lists as a current liability $2.4 billion of “Frequent Flyer Deferred Revenue” and as a long-term liability $2.8 billion for the same account. To reward loyal customers the airlines offer free travel. The footnotes to the 2012 financial statements contain the following information:
The Company has a frequent flyer program that is designed to increase customer loyalty. Program participants earn mileage credits (“miles”) by flying on United, Continental and certain other participating airlines. . . . In the case of the sale of air services, the Company recognizes a portion of the ticket sales as revenue when the air transportation occurs and defers a portion of the ticket sale representing the value of the related miles.

REQUIRED:
a. What is meant by “Deferred Revenue” and where does it fit into the accounting process and the financial statements?
b. Discuss the cash flow implications of the $5.2 billion in deferred revenue for United Continental in 2012 and future years.
c. How do you think an analyst following the company would react to a sharp change (increase or decrease) to the amount of deferred revenue on the balance sheet?



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  • CreatedAugust 19, 2014
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