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IFRS 15 Revenue from Contracts with Customers—Compensation for delays or cancellations (Agenda Paper 5)

Date recorded:

Background

In its June 2019 meeting, the Committee discussed a submission about whether an airline entity shall account for its obligations to compensate customers for delayed or cancelled flights either as part of the transaction price, or as obligations under IAS 37. In the fact pattern submitted, legislation stipulates customers' rights to receive compensation. The Committee decided to publish a tentative agenda decision.

Most of the respondents to the tentative agenda decision agreed with the analysis presented. However, the International Air Transport Association (IATA) disagreed with the Committee's technical analysis—in particular with the analysis of the airline's promised service.

Staff analysis

IATA disagrees with the following description of the entity's promise to the customer: 'the entity promises to transport the customer from one specified location to another within a specified time period after the scheduled flight time'. Instead, IATA states that the entity has promised to 'make its best effort to transport the customer as provided in the itinerary. Failing to do that, the customer may choose a refund, the next available flight or a flight at a future date when certain conditions are met'. The compensation payable is compelled by legislation, which does not form part of the promise within the contract.

The staff disagree with IATA's view because the legislation creates an enforceable obligation for the entity on signing the contract with the customer. The entity has therefore in effect agreed to transport the customer to a specified location within a specified time period after the scheduled flight time; if it fails to do so, it has agreed to pay the customer compensation.

Other comments stated that given the fact pattern the compensation payable to the customer represents compensation for harm and damage applying IFRS 15:B33 and therefore cannot be variable consideration. The staff disagree with this view because the entity's products have not caused any harm or damage if a flight is delayed or cancelled. Therefore the compensation arose from a failure to provide the promised services. This meets the definition of ‘transaction price’ in IFRS 15. The staff recommend a change to the agenda decision in this respect by using the words: "compensation for delays or cancellations forms part of the consideration to which the entity expects to be entitled in exchange for transferring the promised service to the customer".

Staff recommendation

The staff recommend finalising the agenda decision subject to the above-mentioned changes.

Discussion

Most of the Committee members agreed with the staff analysis and the conclusion that the accounting outcome is within the scope of IFRS 15. On the other hand, some of the Committee members continued to hold a different view on the term 'harm or damage' and they considered a customer would be harmed in some ways if the flight is being delayed or cancelled. One of the Committee members was concerned about IATA’s disagreement with the staff analysis as stated in their comment letter. In line with one of the other respondents, a Committee member accepted that the Committee may be unable to address this question and suggested the Committee could refer the matter to the Board for consideration as part of the post-implementation review (PIR) of IFRS 15.

Some Committee members discussed the issue of negative revenue for cancelled flights although they acknowledged that the Committee cannot address this issue as part of this submission.

The Committee decided, by a majority of votes, to finalise the agenda decision.

 

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