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.

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?

  • CreatedAugust 19, 2014
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