discusses whether the proposal made by eTravel Limited to change the timing of the
recognition of its revenue from holiday package sales is acceptable and whether this
would be a change of accounting policy.
After his retirement eight years ago, James Watt established eTravel Limited. The company's main activity in the travel industry is mainly selling the package holiday (flights and accommodation) to the general public through the internet and travel agencies. eTravel Limited is based in Belfast, UK, and the vast majority of the current customers are from the United Kingdom and Ireland. While initially, the company attained an excellent level of growth and return on capital, this is now changing. Last year the company recorded a loss for the first time, the number of holidays sold declined dramatically. This is mainly because of the uncertainty arising from the pandemic. You are a trainee chartered accountant working for a global accountancy and business advisory firm in Northern Ireland. eTavel Limited is one of your firm's clients with whom you have engaged. Echo West, a partner in your firm, recently met with James Watt to discuss the performance of eTravel Limited. Following the meeting, Echo emailed you the following memo. As you are aware, I met with James Watt yesterday. He is concerned with the latest result shown in eTravel Limited financial statements for the year ending on 31 December 2021. James indicated that one of the reasons for the recent decline in the revenue from holiday package sales was caused by the customers' last-minute cancellations. The terms under which eTravel Limited sell its holiday is a 10% deposit required on the booking, and the rest of the balance must be paid four weeks before the travel date. Over the years, eTravel Limited recognised the revenue from selling holiday packages on the date when the holiday was actually taken. From the beginning of 2022, eTravel Limited made a policy change in the holiday package to tackle those last-minute cancellations. All the customers are required to buy holiday cancellation insurance. As a result, it is unlikely that there will be a change in the amount that eTravel Limited will get paid from holiday package sales. In preparing the financial statements for 2022, therefore, James suggests recognising revenue at the booking date. James feels that this change will tackle the adverse effect of the recent sales decline. Although eTravel Limited made a loss last year; however, they believe that it was mainly because of the pandemic. Therefore, eTravel limited is continuously seeking growth through its current expansion strategy by building and acquiring more holiday resorts in top holiday destinations. As a part of that expansion programme, eTravel limited is planning to build a new holiday resort on a private island in the Indian Ocean. Under the proposed agreement, eTravel Limited can use the site for 20 years. The contract states that eTravel limited is not legally bound to restore the island at the end of the term. However, eTravel Limited intends to restore the island to its original state. eTravel Limited has communicated this intention with the partics external to eTravel Limited. Based on the expert opinion, eTravel Limited estimates that restoration will cost them 110,000 (in present value, and the estimate is reliable) after 20 years. eTravel limited's weighted average cost of capital is 10%, and the risk-free rate is 4%. James wants to understand the accounting implications of this on the proposed construction cost. Furthermore, as you may be aware, due to the media coverage, on 1 October 2022, there was an incident in eTravel Limited marketing facility which resulted in four of the company's employees being injured. The four employees have initiated legal proceedings against cTravel Limited, alleging the company's breach of health and safety requirements. It is anticipated that the case will not be heard before January 2023. Given the anticipated lower-than-expected profits for the company in 2022 and that the case is unlikely to be settled before January 2023. the directors would prefer to include any costs associated with the claim in the 2023 financial statements. Chances of costs associated with this claim are set out below: The attached file contains a summary of the company's statements of profit or loss and other comprehensive income, together with statements of financial position, for the year 2019, 2020 and 2021. Also included are the company's business sector average performance indicators for 2019 and 2020. I would be grateful if you would examine this information and meet with James Watt and myself on Friday morning to discuss the above matters, together with the financial performance of the company over the three-year period. Signed: Echo West eTravel Limited Summary Financial Information 1. eTravel Limited - summary statements of profit or loss and other comprehensive income for the years ended 31 December An analysis of the company's cost indicates: 2. eTravel Limited - summary of statements of financial position at 31 December 3. The pandemic caused turmoil in the travel industry. As a result, average industry ratios are heavily distorted, especially in 2021. Therefore, the travel industry's average ratio for 2019 and 2020 provided for benchmarking. After his retirement eight years ago, James Watt established eTravel Limited. The company's main activity in the travel industry is mainly selling the package holiday (flights and accommodation) to the general public through the internet and travel agencies. eTravel Limited is based in Belfast, UK, and the vast majority of the current customers are from the United Kingdom and Ireland. While initially, the company attained an excellent level of growth and return on capital, this is now changing. Last year the company recorded a loss for the first time, the number of holidays sold declined dramatically. This is mainly because of the uncertainty arising from the pandemic. You are a trainee chartered accountant working for a global accountancy and business advisory firm in Northern Ireland. eTavel Limited is one of your firm's clients with whom you have engaged. Echo West, a partner in your firm, recently met with James Watt to discuss the performance of eTravel Limited. Following the meeting, Echo emailed you the following memo. As you are aware, I met with James Watt yesterday. He is concerned with the latest result shown in eTravel Limited financial statements for the year ending on 31 December 2021. James indicated that one of the reasons for the recent decline in the revenue from holiday package sales was caused by the customers' last-minute cancellations. The terms under which eTravel Limited sell its holiday is a 10% deposit required on the booking, and the rest of the balance must be paid four weeks before the travel date. Over the years, eTravel Limited recognised the revenue from selling holiday packages on the date when the holiday was actually taken. From the beginning of 2022, eTravel Limited made a policy change in the holiday package to tackle those last-minute cancellations. All the customers are required to buy holiday cancellation insurance. As a result, it is unlikely that there will be a change in the amount that eTravel Limited will get paid from holiday package sales. In preparing the financial statements for 2022, therefore, James suggests recognising revenue at the booking date. James feels that this change will tackle the adverse effect of the recent sales decline. Although eTravel Limited made a loss last year; however, they believe that it was mainly because of the pandemic. Therefore, eTravel limited is continuously seeking growth through its current expansion strategy by building and acquiring more holiday resorts in top holiday destinations. As a part of that expansion programme, eTravel limited is planning to build a new holiday resort on a private island in the Indian Ocean. Under the proposed agreement, eTravel Limited can use the site for 20 years. The contract states that eTravel limited is not legally bound to restore the island at the end of the term. However, eTravel Limited intends to restore the island to its original state. eTravel Limited has communicated this intention with the partics external to eTravel Limited. Based on the expert opinion, eTravel Limited estimates that restoration will cost them 110,000 (in present value, and the estimate is reliable) after 20 years. eTravel limited's weighted average cost of capital is 10%, and the risk-free rate is 4%. James wants to understand the accounting implications of this on the proposed construction cost. Furthermore, as you may be aware, due to the media coverage, on 1 October 2022, there was an incident in eTravel Limited marketing facility which resulted in four of the company's employees being injured. The four employees have initiated legal proceedings against cTravel Limited, alleging the company's breach of health and safety requirements. It is anticipated that the case will not be heard before January 2023. Given the anticipated lower-than-expected profits for the company in 2022 and that the case is unlikely to be settled before January 2023. the directors would prefer to include any costs associated with the claim in the 2023 financial statements. Chances of costs associated with this claim are set out below: The attached file contains a summary of the company's statements of profit or loss and other comprehensive income, together with statements of financial position, for the year 2019, 2020 and 2021. Also included are the company's business sector average performance indicators for 2019 and 2020. I would be grateful if you would examine this information and meet with James Watt and myself on Friday morning to discuss the above matters, together with the financial performance of the company over the three-year period. Signed: Echo West eTravel Limited Summary Financial Information 1. eTravel Limited - summary statements of profit or loss and other comprehensive income for the years ended 31 December An analysis of the company's cost indicates: 2. eTravel Limited - summary of statements of financial position at 31 December 3. The pandemic caused turmoil in the travel industry. As a result, average industry ratios are heavily distorted, especially in 2021. Therefore, the travel industry's average ratio for 2019 and 2020 provided for benchmarking
