Question

Question 3 You are the auditor of YFC Airlines, an airline approximately the size of Air Canada, and you find out that the change fees, amounting to $6 million, are collected by third parties on behalf of the airline are recognized into passenger revenue as cash is collected. As at the year-end December 31, 2019 $2 million is attributable to future flights. The auditor has asked management to record a liability for the future change fees. You are a consultant that has been hired to defend management's position to record the entire amount into revenue. 1. Using IFRS use two arguments to support management's accounting choice.

Answer 1

According to IFRS 15, on the topic of customers' unexercised rights(breakage):

A portion of the contract liability recognised may relate to contractual rights that the entity does not expect to be exercised – that is a breakage amount. The timing of revenue recognition related to breakage depends on whether the entity expects to be entitled to a breakage amount – i.e. if it is highly probable
that recognising breakage will not result in a significant reversal of the cumulative
revenue recognised. Under this view, the airline can book income for change fees since it is aware that the fees received are for cancellation for future flights and that reversal of this income in the future is not likely.

Accounting for contact modification according to IFRS 15:

A substantive termination penalty is evidence that rights and obligations exist throughout
the term to which the penalty applies. Once the contract term is established, the entity accounts for the contract on that basis – i.e. if the contract term
is established on the basis that the customer will not terminate it, then the termination penalty is not included. On termination, any penalties, whether they
are included in the original contract or negotiated when the parties agree to the partial termination, are accounted for as a contract modification. Hence the airline can treat the receipt of change fees as a contract modification and recognize the revenue attributable to future flights in the current year itself.