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Revenue recognition for tour operators

How is revenue recognised by a tour operator following Covid-19 ?

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I have a client with a 31st March year end who is a tour operator providing educational tours for schools and recognises revenue on the basis of departure date which is obviously a widely accepted basis.

However as a result of Covid-19 the tours planned for departure between April and October 2020 are not taking place. The client has received around £270k in respect of these tours which have not been refunded and so the question is should the revenue be recognised in the accounts to 31 March 2020 as an adjusting event on the grounds that the condition (Covid) existed at the reporting date and as a result of lockdown it was subsequently known after the reporting date that these tours would not take place ? or should the revenue continue to be recognised in the accounts to 31 March 2021 when the tours planned to depart ?

If the former, this will significantly increase the trading results for the year giving rise to a substantially accelerated Corporation Tax liability, and in addition to this the annual TOMS VAT adjustment will be substantially higher on which the VAT rate is calculated and adopted for the following 12 months. It doesn't seem reasonable that an inflated rate should be imposed for the following 12 months as a result of a pandemic which has cripled many businesses by potentially recognising the revenue which would ordinarily have been included in the 2021 accounts.

Obvioulsy the tax and VAT consequences should not influence the correct accounting treatment but we are dealing with an unusual circumstance and something which accounting practices never intended to experience.

Many thanks.

Replies (7)

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By johngroganjga
24th Jul 2020 00:01

You say the fees received for the cancelled tours “have not been refunded”. The obvious question is whether they are going to be refunded, and if not, why not?

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By paul.benny
24th Jul 2020 08:44

I also don't see why the cancelled tours have not been refunded. It's very clear that the customers are legally entitled to refunds for holidays and travel that have been cancelled by the provider. Further, that obligation lies with the tour operator (since it is they who cancelled) and not with a travel insurer.

That said, I see no reason to change the accounting policy - income is recognised on departure. You may have a higher deferred income balance until all of the refunds have been issued or rebooked trips have been taken.

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By Watbooks
24th Jul 2020 11:54

Is the £270k actually held on account for the customer? If so then it stays on Balance Sheet and no Revenue recorded until the new trip departs.

I can only see this as Revenue if they Tour Op is not going to return the £270k at all. If they take this action it is probably to cover tour costs so margin wouldn't be skewed too much.

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By pdorrington
28th Jul 2020 16:06

The fees received for the tours are not going to be refunded as these have been used to pay for the costs incurred associated with the tours which are not being repaid to the tour operator client. Many of the schools cancelled the tours by their own choice BEFORE lockdown and the travel restrictions were imposed and they accept the terms of cancellation and no-refund policy.

Obviously these specific tours have not taken place and so the question still remains as to whether the income should be deferred and recognised in the following year when the tours were due to depart or recognise the revenue immediately in the current year when the PM announced school closures from 20/3/20.

Many thanks.

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Replying to pdorrington:
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By paul.benny
28th Jul 2020 16:32

If monies paid are being carried over to new travel, it becomes just a customer deposit and should only be recognised on departure.

Media reports indicate that the CMA are not being sympathetic towards tour operators who refuse to give cash refunds travel that could not go ahead because of COVID-19. Whatever the tour operator may be saying now, they may be forced to provide refunds in due course.

Whilst we don't have the facts of case case, I would say that a prudent approach to supposed 'non-refundable' amounts is called for.

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By pdorrington
28th Jul 2020 17:27

The £270k has actually become £160k as a number of schools did not pay the balances due and so the £160k represents non-refundable deposits for planned tours between May and July and a large sum paid for April tours which could not be cancelled as insufficient notice was provided and the tour operator had paid all associated costs which were not refunded by the relevant service providers.

Would an approach of recognising the revenue in Y/E 31/3/20 for tours which the schools cancelled pre 31/3/20 and in Y/E 31/3/21 for tours cancelled post 31/3/20 be permitted on the basis that the duration of lockdown was unknown and so as at 31/3/20 there was a possibility that the tours could have still taken place had lockdown and travel restrictions been relaxed ?

Whilst the condition existed at the balance sheet date the duration was unknown and therefore it could not be determined with certainty that the subsequent tours would not take place prior to the date the schools cancelled.

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Replying to pdorrington:
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By Watbooks
28th Jul 2020 19:31

pdorrington wrote:

Would an approach of recognising the revenue in Y/E 31/3/20 for tours which the schools cancelled pre 31/3/20 and in Y/E 31/3/21 for tours cancelled post 31/3/20 be permitted on the basis that the duration of lockdown was unknown and so as at 31/3/20 there was a possibility that the tours could have still taken place had lockdown and travel restrictions been relaxed ?

I can't comment if this is 'permitted' as such but it certainly seems reasonable to include the costs and income in the accounts as at the time of cancellation. If the tour was cancelled in March then y/e 20, if cancelled in April then y/e 21. With certain tours you may find you have some discretion... If costs were all paid in y/e 20 then I would be inclined to include the income in the same year and leave 2021 empty.

As there was no tour there is no tour departure date to worry about. I understand that this income is actually cancellation income so is outside of TOMS VAT. So no need to worry about annual toms calc ratios.

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