Question

Air canada offers a customer loyalty program that grants members award miles for each flight taken. members can redeem air miles which expire every 5 years after issuance, for future flights. members must redeem 15 000 miles and pay $100 service charge to obtain a flight under the reward program. other facts related to flights and airmails are:

- In 2019, air canada received $10 000 000 cash in flight- related revenue for flights taken in 2019.

-Air canada expects that 80% of the 9 375 000 air miles awarded in 2019 will be redeemed prior to their expiry.

-the performance obligation pertaining to the award miles is estimated to be $75 000

-during 2020, 200 award flights were claimed

-during 2021, 150 award flights were claimed

QUESTION:

1) prepare required journal entries to record flight related and air mile activity for 2019.

2) Prepare journal entries to recognize award revenue in 2020 and 2021

Answer 1

Background :

Accounting treatment of loyalty points or reward program is specified under IFRS15. Further IFRIC13 gave additional guidance for specific situation. IFRS 15 have recommended to follow deferred revenue approach for accounting of loyalty points liability and similarly US GAAP also mandated to follow deferred revenue approach from 2018.

Under deferred revenue approach following is required :

a. Revenue will be deferred for the loyalty obligation

b. Revenue will be recognised from deferred revenue when performance obligation for loyalty obligation is fulfilled

We need to work out cost obligation per award flight as that will be helpful in journal entry which is worked out as under. It is assumed that the estimated cost of award flight 75000 is gross cost and not net cost after reduction of service charge of 100 per award flights.

a	Total Air Miles awarded	9,375,000
b	80% expected to be redeemed (a*80%)	7,500,000
c	Minimum point to claim award flight	15,000
d	Total number of award flight (b/c)	500
e	Total Performance obligation to award miles	75,000
f	Performance obligation per award flight (e/d)	150
g	Service Charge per award flight	100
h	Net cost per award flight (f-g)	50
i	Net pefromance obligation for 500 award flights (h*500)	25,000

Q.1 Prepare required journal entries to record flight related and air mile activity for 2019.Now let us answer the questions :

a	Journal Entry for flight related activity
	Cash A/c Debit				1,000,000
	Revenue from Flight Operation A/c Credit				1,000,000
	(Being Cash received from Flight Operation)
b	Journal Entry for air mile activity
	Revenue from Flight Operation A/c Debit				25,000
	Deferred revenue from Flight Operation A/c Credit				25,000
	(Being deferred revenue entry passed for 500 award flight obligation relating to air miles awards as per "deferred revenue" approach)

Q.2 Prepare journal entries to recognize award revenue in 2020 and 2021

a	Journal entries to recognize award revenue in 2020
	Deferred revenue from Flight Operation A/c Debit				10,000
	Revenue from Flight Operation A/c Credit				10,000
	(Being revenue recognised from deferred revenue for 200 air flight award claims)
b	Journal entries to recognize award revenue in 2021
	Deferred revenue from Flight Operation A/c Debit				7,500
	Revenue from Flight Operation A/c Credit				7,500
	(Being revenue recognised from deferred revenue for 150 air flight award claims)