Alaska Airlines and Horizon Air 2013 Annual Report Download - page 134

are available, as well as other legislative
changes that are out of our control.
In 2013, we made tax payments of $149 million,
and had an effective tax rate of 37.7%. In 2014,
we expect to pay more in cash tax payments,
however, this is highly dependent on actual
taxable income and other factors that are
difficult to estimate at this time.
CRITICAL ACCOUNTING ESTIMATES
The discussion and analysis of our financial
position and results of operations in this MD&A
are based upon our consolidated financial
statements. The preparation of these financial
statements requires us to make estimates and
judgments that affect our financial position and
results of operations. See Note 1 to the
consolidated financial statements for a
description of our significant accounting policies.
Critical accounting estimates are defined as
those that reflect significant management
judgment and uncertainties and that potentially
may result in materially different results under
varying assumptions and conditions.
Management has identified the following critical
accounting estimates and has discussed the
development, selection and disclosure of these
policies with our audit committee.
MILEAGE PLAN
Our Mileage Plan loyalty program awards miles to
member passengers who fly on our airlines and
many of our travel partners. Additionally, we sell
miles to third parties, such as our bank partner,
for cash. In either case, the outstanding miles
may be redeemed for travel on our airlines or any
of our travel partners. As long as the Mileage
Plan is in existence, we have an obligation to
provide this future travel.
For miles earned by passengers who fly on us or
our travel partners, we recognize a liability and a
corresponding selling expense representing the
incremental cost associated with the obligation to
provide travel in the future. For miles sold to third
parties, the sales proceeds that represent award
transportation and certificates for discounted
companion travel are deferred and recognized
when the transportation is delivered, and the
remaining components are recorded as
commission in other-net revenue in the period the
miles are sold. Commission revenue recognized
for the years ended December 31, 2013, 2012
and 2011 was $213 million, $143 million and
$138 million, respectively. The deferred revenue
is recognized as passenger revenue when awards
are issued and flown on one of our airlines or
expire, and as other-net revenue for awards
issued and flown on partner airlines.
At December 31, 2013, we had approximately
137 billion miles outstanding, resulting in an
aggregate liability and deferred revenue balance
of $656 million. Both the liability and the
deferred revenue are determined based on
several assumptions that require significant
management judgment to estimate and
formulate. There are uncertainties inherent in
these estimates; therefore, different
assumptions could greatly affect the amount
and/or timing of revenue recognition or Mileage
Plan expenses. The most significant
assumptions in accounting for the Mileage Plan
are described below.
1. The rate at which we defer sales proceeds
from sold miles:
We defer sales proceeds under two
accounting methodologies: the relative selling
price method, which represents
approximately 94% of sold miles, and the
residual accounting method, which
represents the remaining 6%. For contracts
that were modified after the effective date of
Accounting Standards Update 2009-13,
"Multiple-Deliverable Revenue
Arrangements—a consensus of the FASB
Emerging Issues Task Force" (ASU 2009-13),
we determined our best estimate of selling
price by considering multiple inputs and
methods including, but not limited to, the
estimated selling price of comparable travel,
discounted cash flows, brand value,
published selling prices, number of miles
awarded and the number of miles redeemed.
We estimated the selling prices and volumes
over the terms of the agreements in order to
determine the allocation of proceeds to each
48