Travel Industry Financials - Revenue recognition

Due to the dynamic and diverse way that the UK travel industry has developed, the previous differentiated principal and agent lines have become very blurred.  In the past it was quite simple to ascertain that the principal was the tour operator who owned the aeroplane and the hotel.  The travel agent was a shop where you looked at brochures.  The onset of the internet, complex supply chains, market forces, a very dynamic industry, regulator pressure, growth of diverse consumer demand and some very astute entrepreneurs has lead to a difficulty in determining who is who. 

FRS102 doesn't contain a definitive answer for the industry and in September 2016 when it was introduced we had the added difficulty of FOREX contracts and a drop in currency of 20% due to the B" word in June 2016.  These changes for me meant that once the considered most prudent method of income recognition, departure date, became not so prudent in that it has a lot of off balance sheet indicators that were not reflected on the balance sheet.  The important part of recognition policy is that of what is best suited for that individual travel company.  It is also important to consider the ultimate group policies.  The following are the most common forms of income recognition in travel companies : 

  • Booking date : This is the most common for travel agencies.  It is the most aggressive recognition policy and the most agreeable to HMRC as it drags profit in sooner, rather than deferring it.  It is important when using this policy that the risk of cancellation is assessed and appropriate provision put in place.  This is particularly so when the model of the agency is very low deposits to sales price ratio.  Booking date is not acceptable for tour operators or principals who carry commitment to suppliers.  
  • Deposit/final balance payment : This takes some of the profit in at deposit and remainder when customer balance paid, usually about 8 weeks prior to departure (on average).This is quite difficult on the administration department and dependent on the terms and conditions.
  • Departure date : Considered to be industry standard when acting as a principal. HMRC consider that on computations some adjustment should be made for profit on non-cancellable deposits.
  • Return date :  this is most prudent, but not popular for obvious reasons.
  • IFRS compliant groups will often insist upon departure basis pro-rata when the travel arrangements span the year end.  This is very common for cruise companies whose parent is situated overseas.
  • Non cancellable/refundable : When the holiday arrangement becomes 100% non-refundable to the consumer, as this is at a stage when the right to consideration passes.  

With these options what should you look for when assessing if the recognition policy is appropriate ? Look at the terms and conditions and see if they are agency or principal. Look at what regulations apply and how the ATOL regulations may give additional responsibilities. Check the cancellation terms and how this corresponds to the recognition policy. Use good judgement and if there is a change in policy ensure you understand the necessary disclosures, appropriateness and rationale as to why.