A holiday can mean different things to different people. Whether you prefer activity and adventure, or fly and flop, holidays come in all shapes and sizes. And so do the contracts and accounting arrangements that sit behind them.
Selling holidays can be a complex business with many different parties involved. Agents, operators, airlines, hotels, destination management companies – the list goes on.
With so many links in the supply chain to organise, and sometimes more than a year between a customer booking a holiday and returning home, there are many potential trigger points in the sales cycle when revenue could be classed as “earned”.
Hardly a surprise then, that recognising revenue is such a hot topic in the travel sector.
In practice, we see our clients use many different revenue recognition policies. The range is almost as wide as the variety of holidays they sell. Some travel companies sell a range of products, in different ways, and need to use a different revenue recognition policy for each.
In this post, we set out some of the most common approaches to accounting for revenue recognition in the travel sector. Here are the 6 most common, in chronological order:
1. Booking date
If you’re acting as an agent for other suppliers, then you would normally recognise revenue on booking date. The conventional logic is that the agent’s role is largely fulfilled by the time the booking is secured. Agents generally record only their commission as statutory revenue, though many will also disclose total gross receipts in their accounts as Total Transaction Value (TTV).
If you are a principal, who carries full responsibility for delivering the services, then recognising revenue (normally recorded as the total amount received from customers) at the booking date would be considered very aggressive and you might struggle to get it past your auditors.
Of course, you could be acting as an agent for several suppliers at the same time. By bundling services together you could be deemed a package organiser from a regulatory point of view. Many such businesses would recognise the total customer receipt as revenue in their P&L at the booking date, though it’s a grey area and certainly open to challenge. At the very least you would need to book a sensible cancellation provision to cover off the risk of recognising too early.
2. Deposit/final balance split
Some travel agents and operators split their revenue. They take the deposit to the P&L at the time of booking on the basis that it is non-refundable. Then they recognise the remainder on departure. This approach spreads the revenue over the term of the booking but can be very complicated to track when you have a large number of bookings.
A common trigger for revenue recognition is the point at which the holiday becomes 100% non-refundable. Tread carefully though! Recent court cases have challenged travel companies in this area. Your refund policy should be set out clearly in your terms and conditions. It must be fair, and it should comply with your obligations under The Package Travel & Linked Travel Arrangements Regulations 2018, (and if you’re an ABTA member, the ABTA Code of Conduct).
4. Supplier/customer final payment
Travel companies often account for revenue at either the point at which the customer pays the final balance or when suppliers have been paid in full. Depending on your role in the process, there may be some logic to this approach. However, the timing of receipts from customers and payments to different suppliers can vary widely, making it awkward to standardise.
5. Departure date
Recognising revenue on departure date is widely considered to be the travel industry standard when acting as a principal and/or the package organiser. With this approach, all monies received in advance would typically be held on the balance sheet as deferred income until the departure date.
6. Return date
This is certainly the most prudent approach to recognising revenue for travel companies. If you’re operating a trust account it also aligns your revenue recognition with the point you receive your cash. But it’s not a popular approach for obvious reasons.
A word on IFRS 15
If your business is governed by International Financial Reporting Standards, then its IFRS 15 – Revenue from Contracts with Customers – that sets out your obligations.
The standard came into force in 2018 and requires companies to recognise revenue when control of the goods or services transfers to the customer. This differs from traditional accounting rules that focussed on the transfer of risk and reward.
IFRS 15 also requires revenue to be allocated to each separate good or service provided, with potentially different revenue recognition points for each. Accounting for travel services under IFRS 15 can be particularly tricky! Revenue for the flight tickets should be recognised on the day when the ticket is issued, whereas revenue from package holidays should be spread over the period of the holiday.
The good news is that, for now, IFRS 15 only applies to travel companies that are listed or have publicly traded securities.
There is no straightforward answer to the correct revenue recognition policy but here are 3 key points that could help you determine the most appropriate measure:
a. Whose booking terms and conditions are in use?
The terms and conditions governing the sale will tell you a lot about when you have delivered your part of the service. Check whether the sale is covered under your terms and conditions, or are you an agent where your supplier’s terms apply?
b. Which regulations apply?
If the sale is covered by The Package Travel and Linked Travel Arrangements Regulations and/ or the ATOL Regulations you may have additional responsibilities and potential liabilities for delivering the travel services. If so, maybe recognising revenue close to departure is more suitable.
c. What are the cancellation terms?
If you are recognising revenue in advance of departure, do you have a sensible cancellation provision? What level of non-refundable deposit is collected, would it protect your gross margin?
Join our newsletter
If you enjoyed this post, why not sign up to our newsletter? Get our latest blog posts, industry updates and exclusive content.Sign up