ABC Airlines (ABC) carried more than 11.9 million passengers to over 160 destinations in 17 countries in 2014. ABC is the descendant of several predecessor companies, including AB Air and BC Airlines. The amalgamated company was created in 1999. In the years that followed, the world air travel industry slumped and caused many airlines to go bankrupt or suffer severe financial hardship. ABC weathered the storm by going through a significant restructuring. One of the changes as a result of the restructuring was to have ABC employees take share options as part of their remuneration. This resulted in employees investing $200 million in the company. The company is privately owned.
In 2014, ABC was still suffering losses, now partly due to increased competition and falling seat prices. Losses were $187 million in 2012 and $194 million in 2013. The CEO announced a new restructuring plan that would hopefully put an end to the continuing losses. The plan focused on three areas: improved network profitability, decreased overhead costs, and decreased labour costs. For the latter, employees were asked to accept reduced wages over a four-year period.
Just like most companies, ABC is now concerned with increasing market share and maintaining customer loyalty. On the company's website, the following advertisement appears:
"Fly 5, Fly Free-Fly five times with ABC Airlines and its worldwide partners and earn a free trip. The more you fly, the more the world is within reach."
Free flights have been offered by ABC in the past through its well-publicized frequent flyer program. Under the program, customers earn points for flying with ABC and, once they accumulate enough points, they can then use them to take free flights. In the notes to its financial statements, ABC notes that the incremental costs of frequent flyer points are accrued as the entitlements to free flights are earned. The accrual is included as part of accrued liabilities.
Excerpts from the 2014 financial statements follow (in millions):
Total assets (including current assets of $456.5) ........................... $1,866
Current liabilities ................................................................... 765
Long-term debt ...................................................................... 841
Preferred shares ..................................................................... 289
Common shares ..................................................................... 407
Deficit ............................................................................... (436)
Total liabilities and equity ....................................................... $1,866
Instructions
Adopt the role of company management and discuss the treatment of the "Fly 5, Fly Free" program for financial reporting purposes. The company is interested in understanding how the program would be accounted for under both IFRS and ASPE.