Most airlines offer promotional programs in which passengers accumulate miles over time; when they have earned enough miles, they receive free tickets. In the past, airlines did not make any accounting entries for these free tickets. The free rider merely uses available seats or, on occasion, displaces a ticketed passenger.
The FASB adopted a method of accounting for tickets issued under these programs. They require that a portion of the fare paid when a passenger in such a program pays for a ticket be deferred until the free ride is used. For example, if a passenger purchases a $200 ticket, a portion, say $20, would not appear as revenue to the airline until the free trip is taken. It would be considered unearned revenue until then.
REQUIRED:
a. Evaluate the accounting standard in terms of the principle of revenue recognition and matching List the criteria of revenue recognition, and suggest when it would be appropriate to recognize the revenue from a ticket sale. Given your suggestion, how should the related costs be accounted for?
b. Continental Airlines changed the way it accounts for frequent flyer” credits, deferring more of the revenue it recognizes from this program until the service is actually provided. How would this change affect income in the year of the change, and does it appear to be a belier application of matching? Why or why not?