Atlas Airlines Inc. Atlas Airlines Inc. (AAI) is Canadas largest airline and the largest provider of scheduled passenger services in the Canadian market, Canada-U.S. transborder market and in the international market to and from Canada. Atlas was founded in 1955 and inaugurated its first flight in 1956. Today, the company is publicly traded on the Toronto Stock Exchange. Atlas has historically been a profitable company however in recent years AAI has experienced declining profits due to high fixed and variable costs. Aircrafts are expensive pieces of equipment to purchase and maintain and airlines also need a large labour force to run their complex operations. Volatility in oil prices is yet another challenge that airlines face. In response to AAIs declining performance, the Board of Directors introduced a new bonus structure for senior management based on a percentage of pre-tax net income to maximize profits. All C-suite executives including Matthew Jacobs, AAIs new Chief Financial Officer will be impacted by the new bonus structure. If AAI fails to meet a pre-tax net income of $100.0 million management will not receive a bonus for the year. The current estimate of AAIs pre-tax net income before adjustments is $102.7 million. It is now January 25, 2021 and you CPA, are employed by RLM LLP, Atlas Airlines external auditor. The engagement partner has asked you to summarize the key outstanding issues for the fiscal 2020 audit of AAI for a meeting with Matthew next week. The most significant issue relates to a new customer loyalty program, Atlas VIP, implemented by AAI in fiscal 2020. The program grants VIP members award miles for each flight taken. For each mile that a passenger travels on a paid flight, the passenger accrues one flight mile. Passengers can redeem accrued flight miles for free travel on a future flight. The earned flight miles do not expire. During 2020 AAI awarded 200,000,000 flight miles, 10,400,000 of which were redeemed. To date, AAI has not recorded any obligation related to the award miles. You review an email drafted by the CFO Matthew Jacobs which had the following excerpt: In my experience, most customers do not redeem their flight miles. Therefore, AAI does not need to record any obligation related to the flight points. Those that have redeemed their flights this year are immaterial. RLM LLP has been AAIs auditors since 2016. You review AAIs prior year audit file and identify the following regarding the customer loyalty programs previously offered:

The average redemption rate of award miles is 70% Each flight mile has an estimated fair value of $0.05 / mile

The engagement partner asks you to draft a memo summarizing the issue and its impact on the 2020 financial statements for your meeting with Matthew next week.

Required Prepare the memo. (Ignore taxes).