TOKYO (Nikkei)–The introduction of international accounting standards in Japan is likely to have a negative impact, at least temporarily, on the earnings of airlines and other firms that offer customer rewards programs.
The deadline for the mandatory adoption of the standards by Japanese corporations will be determined by the relevant authorities in 2012.
According to the international standards, which were unveiled in June 2007, a firm must, at the moment of granting rewards points, take the future cost of providing point-related services and deduct it from the current sale. At the same time, the firm must record the points as debt; this debt will effectively be negated when the points are redeemed by having the points count as sales.
For example, if an airline sells a ticket for 20,000 yen and grants mileage points that are worth 1,000 yen, the airline should record the sale as 19,000 yen. Meanwhile, the 1,000-yen reward will be recorded as debt; this will counterbalanced when the points are redeemed.
At present, there are no clear domestic accounting regulations governing mileage points, and as such, Japanese airlines apply different procedures.
Japan Airlines Corp. records points as an expense at the time of issuance; it also books the points as debt.
All Nippon Airways Co. does not account for mileage points at the time of issuance; instead, it issues award tickets as 100% discounted tickets. Furthermore, ANA sets aside an allowance for unused points at the end of each fiscal year, by estimating the associated expenses to be incurred in the future.
Neither of the airlines disclose the total debt connected with their reward systems, arguing that the amount is too small to be of much practical significance.
Indeed, the expenses associated with point redemption appear to be minor when compared with fixed costs, which account for the bulk of the outlays in the airline industry.
Effect on earnings
Under the international standards, the value of each mile would be around 2-3 yen when exchanged for a round-trip domestic ticket. When exchanged for rewards associated with debit cards, the value would be around 1 yen.
According to an estimate by Nomura Research Institute Ltd., JAL and ANA issued a total of at least 65 billion yen in mileage points in fiscal 2008.
Under the international accounting standards, the two airlines would have perhaps had to book that much debt, or maybe even more.
The new standards hold that airlines cannot book mileage as earnings until they are exchanged for rewards, or until their validity expire. Points issued by both airlines expire after three years.
In the long run, the impact of mileage points on earnings is neutral.
However, accounting for rewards points under the new standards could drag on airline sales or profits in the first year the standards are adopted, according to Katsumi Tomita, a consultant at Nomura Research Institute.
–Translated from an article by Nikkei staff writer Kenjiro Suzuki
(The Nikkei June 12 morning edition)