One size doesn’t fit all – 6 ways to recognise revenue in the travel industry, and 3 things to consider when assessing your options

One size doesn’t fit all – 6 ways to recognise revenue in the travel industry, and 3 things to consider when assessing your options

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.

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.

Take agent vs principal for example. Once upon a time, life was more straightforward. 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, things are a little more complex: There are specialist tour operators and commodity travel agents; luxury differentiators and mass market bucket shops.

It can be very difficult to work out who is who in the transaction, and with 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.

Taking a different road

In practice, we see our clients use many different recognition policies. The range is almost as wide as the variety of holidays they sell. Here are the 6 most common, in chronological order:

1.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 cancellation provision in place.

2.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.

3.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, though recent court cases challenging excessive non-refundable deposits may call this into question.

4.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.

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

6.Return date – certainly the most prudent basis and not a popular one for obvious reasons.

The road map to recognition

Financial Reporting Standard 5 (FRS 5), Application Note G gave some guidance on when to recognise revenue but it could also be interpreted in many different ways. The recent introduction of FRS 102 doesn’t exactly narrow down the options.

The fact is, 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:

a.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?

b.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.

c.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, and though its unlikely we’ll ever see consistency in the accounts of the travel industry, its certainly worth a look to make sure your policy is on the right road.

contact arrow contact arrow up email facebook linkedin mesage icon mobile menu mobile select arrow mobile select arrow up mobile submenu icon mobile submenu icon up overview icon paganation left arrow paganation left arrow hover paganation right arrow paganation right arrow hover service arrow service arrow active service arrow active down share icon slider left arrow slider left arrow hover slider right arrow tab mobile arrow tab mobile arrow tab mobile arrow up tab mobile arrow up hover twitter twitter icon video icon youtub video icon technology trust