Most airlines offer promotional programs in which passengers accumulate miles over time; when they have earned enough
Question:
Most airlines offer promotional programs in which passengers accumulate miles over time; when they have earned enough miles, they receive free tickets. Currently, airlines do not make any accounting entries for these free tickets. The free rider merely uses available seats or, on occasion, displaces a ticketed passenger. A panel of the American Institute of CPAs has recommended that the FASB adopt a new method of accounting for tickets issued under these programs. They propose 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 rev¬ enue until then. REQUIRED: Evaluate the proposed 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?
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