United Airlines, Inc. ${?}^6$

Prompted by her observation that different airlines seemed to account for their unredeemed frequent flier mileage obligations differently, Kim decided to ask her study group the question: How should an airline account for its unredeemed frequent flier mileage obligations?

To focus the study group discussion, Kim prepared a short description of United Airlines Inc.$\text{'}$s Mileage Plus program. United Airlines $("$United$"),$ through its frequent flier rewards program $($Mileage Plus$),$ rewarded frequent fliers with mileage credits that could be redeemed for free, discounted, or upgraded travel, and non$-$travel awards. United also sold frequent flier mileage credits to non$-$airline entities for use as awards to customers for using their products or services, such as credit cards. More than $54$ million members were enrolled in the program.

United had considerable leeway in changing the Mileage Plus program's expiration policy, program rules, and program redemption opportunities. For example, effective December $31,2007,$ United announced that it was reducing the expiration period for inactive accounts from $36$ months to $18$ months.

A United subsidiary, UAL Loyalty Services, administered much of the Mileage Plus program along with a number of United's non$-$core marketing businesses, such as United's e$-$commerce activities.

At December $31,2008,$ the outstanding Mileage Plus frequent flier miles totalled approximately $478\mathrm{.}2$ billion, of which management estimated that $362$ billion would ultimately be redeemed based on certain mileage redemption and expiration pattern assumptions.

${?}^4$ Financial Accounting Standards Board, "Accounting for Contingencies," SFAS No$.5.$ According to this standard, remote contingent liabilities need not be disclosed.

${?}^5$ A zero$-$coupon security does not make any periodic interest payments but instead is sold at a deep discount from its face value $($US$$1$ million equivalent currency in the case of the Austral Electronics zero$-$coupon bond$).$ The buyer of such a bond receives the specified rate of return by gradual appreciation of the security, which is redeemed at face value on a specified maturity date. $($John Downes and John Elliot Goodman, Dictionary of Financial and Investment Terms, Barron's Financial Guides.$)$

${?}^6$ Unless otherwise noted, the United Airlines, Inc. caselet is based on the company's $2008$ annual report.

Exhibit $1$ United Airlines, Inc.

Selected $2008$ Mainline Operating Statistics

$\backslash$table$[[$Revenue passengers $($millions$),63],[$Revenue passenger miles $($RPMs$){?}^a,110,061],[$Available seat miles $($ASMs$){?}^b,135,861],[$Passenger lead factors ${?}^c,81\mathrm{.}0\%$

Exhibit $1$ presents selected $2008$ United operating statistics. Exhibit $2$ shows United's $2008$ mainline operating expenses.