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JetBlue and the New Revenue Recognition Standard Case Solution

Solution Id Length Case Author Case Publisher
2810 1382 Words (7 Pages) Emily Booth, Elizabeth Blankespoor, Jaclyn C. Foroughi Stanford Graduate School of Business : A231
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In 2018, JetBlue Airways Corporation announced that it would adopt the new revenue recognition standard known as Accounting Standards Codification (ASC) Topic 606. The new standard would change the way JetBlue recognizes revenue from its loyalty program, TrueBlue, from when customers redeem their points to when they earn them. This change would result in a significant increase in revenue for the airline. JetBlue had to update its accounting policies, processes, and systems to comply with the new guidance and educate its stakeholders about the impact of the new standard on its financial results. Despite these challenges, JetBlue successfully adopted the new revenue recognition standard and reported its financial results in compliance with the new guidance. The airline's adoption of the new standard was seen as a positive step toward greater transparency and consistency in financial reporting across industries.

Following questions are answered in this case study solution

  1. For each of the following topics, describe the prior accounting, the likely changes (if any) the new revenue recognition standard will require, and the potential impact of those changes on patterns of revenue recognition. Indicate the general direction of impacts; do not try to quantify the change amount):

    a. Flight Transportation (for tickets used and for ticket/credit “breakage”) (Hint: Focus on Unexercised Rights in the new model for breakage) 

    b. Loyalty Program (Hint:  Focus on Step 2 of the model)

    c. Ancillary Services and Other Revenue (Hint: Focus on Step 2 of the new model, and contract Modifications as well for change fees specifically)

  2. Where are the areas for discretion and judgment (and opportunities for earnings management)?

  3. Will the new revenue standard provide more decision-useful information than prior U.S. GAAP?

Case Analysis for JetBlue and the New Revenue Recognition Standard

1. For each of the following topics, describe the prior accounting, the likely changes (if any) the new revenue recognition standard will require, and the potential impact of those changes on patterns of revenue recognition. Indicate the general direction of impacts; do not try to quantify the change amount):

1. Flight transportation
Flight Transportation (for tickets used)

Airline ticket sales have always been reported at purchase. The new revenue recognition standard counts money after a journey. Hence, ticket sales income will fall, but flight usage revenue will rise. This accounting modification may dramatically impact JetBlue's financial reporting. That may increase JetBlue's revenue volatility, particularly. JetBlue makes more money with more passengers. Investors and experts may find it tougher to predict JetBlue's financial future. JetBlue must also have enough funds to pay for unrecovered prior flights. JetBlue may borrow or seek other cash to meet these expenditures.

Flight Transportation (for ticket/credit "breakage")

Using a credit to buy a ticket is used to record revenue. The new standard requires revenue recording if a ticket is not used before the credit expires. Hence, ticket sales income will reduce, and credit expiration revenue will rise. This accounting modification may dramatically impact JetBlue's financial reporting. That may increase JetBlue's revenue volatility, particularly. High credit expiry rates increase JetBlue's revenue recognition. Investors and experts may find it tougher to predict JetBlue's financial future. JetBlue must also have enough cash to pay for expiration credits without income. JetBlue may borrow or seek other cash to meet these expenditures.

2. Loyalty program

Businesses used to count loyalty program revenue from vacation redemptions. As clients redeemed points, corporations reported income progressively. Under the new revenue recognition standard, firms must report purchases when consumers are expected to redeem their loyalty points, and the income can be projected with reasonable certainty. This may accelerate revenue recognition.

A firm that offers a loyalty program with a travel expenditure redemption option must now assess the likelihood that consumers will redeem their points and the revenue they will generate. If it's likely that points will be redeemed and produce enough money to cover program expenditures, the business will report revenue from the program.

This new accounting standard may need significant revenue recognition changes. A firm that earns and redeems loyalty points in the first and second quarters would now recognize revenue in the first quarter. This may shift revenue from the second to the first quarter.

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