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Travel Industry - Revenue Recognition

8th Dec 2016
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Henry Ford once famously said of the Model T ford you can have any colour you want, so long as it is black. He didn’t believe in variety and his products came to epitomise the production line approach to producing one-size-fits-all consumer goods.  

Henry Ford

The modern UK travel sector is pretty much the opposite of one-size-fits-all. Holidays come in all shapes and sizes and so do the travel firms that sell them. There are specialist tour operators and commodity travel agents; luxury differentiators and mass market bucket shops; With a plethora of options available, it’s hardly a surprise they can’t agree when to recognise revenue. 

Taking a different road

Financial Reporting Standard 5 (FRS 5), Application Note G gives guidance on when to recognise revenue but it can be interpreted in many different ways, and the recent introduction of FRS 102 doesn’t contain a more definitive answer for the industry.  Once upon a time, it was easy to see who was agent and who was principal. The principal was the tour operator who owned the aeroplane and the hotel. Meanwhile the travel agent was the one in the high street shop surrounded by brochures. These days, the supply chain is a little more complex and it can be very difficult to determine who is who. Furthermore, with sometimes more than a year between booking and returning home, there are many potential trigger points during the sales cycle to consider. 

In practice, we see our clients using a wide range of recognition policies which is almost as diverse as the holidays they sell. Here are the most common, in chronological order: 

Booking date - the most common among agency related revenue but certainly the more aggressive recognition policy as a principal. To mitigate the risk of cancellation as a principal you would expect there to be a provision in place. 

Deposit / final balance split - the customer deposit is recognised at date of booking and the remainder on departure. Difficult to administer and dependent on terms and conditions.

Non-cancelable / refundable -  a common trigger for recognition is the point at which the holiday becomes 100% non-refundable to the consumer. Arguably a point at which the right to consideration passes. 

Supplier / customer final payment - revenue is recognised at either the point at which the customer pays the final balance, or when suppliers’ have been paid in full. The timing of each can vary and the right to consideration is not as clear as when non-refundable. 

Departure date - considered to be the industry standard when acting as a principal.

Return date - certainly the most prudent basis, but not a popular one for obvious reasons. 

The road map to recognition 

There is no straight forward answer to the correct policy but here are 3 key points that could help you determine the most appropriate measure: 

Whose booking terms and conditions are in use? -  does the company act under the terms of an agency agreement, or are sales covered by their own terms and conditions? 

Which regulations apply? - The Package Travel Regulations and/ or ATOL Regulations may give the company additional responsibilities and potential liabilities. If so, maybe recognising revenue close to departure is more suitable.  

What are the cancellation terms? - If recognising revenue in advance of departure, is there a sensible cancellation provision? What level of non-refundable deposit is collected, would it protect the gross margin?

Ford’s production line approach certainly yielded a consistent output, a concept not seen in the reporting of revenue across the travel industry. Have you considered your clients model, and is their policy on the right road?  

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