Southwest Airlines 2015 Annual Report Download - page 94

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points and other items to Chase. This material modification triggered an accounting change under ASU
2009-13, which is recorded on a prospective basis. The impact of the accounting change is that the
Company estimated the selling prices and volumes over the term of the Agreement in order to
determine the allocation of proceeds to each of the deliverables (travel points to be awarded; use of the
Southwest Airlines’ brand and access to Rapid Reward Member lists; advertising elements; and the
Company’s resource team). The Company records passenger revenue related to air transportation and
certificates for discounted companion travel when the transportation is delivered. The other elements
are recognized as Other - net revenue when earned.
The Company followed the transition approach of ASU 2009-13, which required that the Company
adjust the existing deferred revenue balance to reflect the value, on a relative selling price basis, of any
undelivered element remaining at the date of contract modification. The relative selling price of the
undelivered element (air transportation) was lower than the rate at which it had been deferred under the
previous contract, and the Company recorded a one-time, non-cash adjustment to decrease frequent
flyer deferred revenue and increase revenue through the recording of a Special revenue adjustment of
$172 million. In addition, 2015 Operating revenues increased by a net $255 million as a result of the
Agreement and the resulting July 1, 2015 change in accounting methodology, all of which would have
been deferred under the Company’s previous accounting. The estimated impacts on revenue and
earnings from this change in accounting principle are as follows:
(in millions, except per share amounts) Year ended December 31, 2015
Passenger revenue $ (89)
Special revenue adjustment 172
Other revenue 344
Operating revenues $ 427
Net income $ 227
Net income per basic share $ 0.34
Net income per diluted share $ 0.34
For all points sold to business partners that are expected to expire unused, the Company recognizes
spoilage in accordance with the redemption method. The Company’s consolidated liability associated
with the sale of frequent flyer points, was approximately $1.3 billion as of December 31, 2015, and
2014, which is classified within Air traffic liability. During fourth quarter 2014, the Company obtained
sufficient historical behavioral data to develop a predictive statistical model to analyze the amount of
spoilage expected for points sold to business partners, which indicated an increase in the expected
spoilage rate. This change in estimate was recorded on a prospective basis, as of October 1, 2014, the
impacts on revenue and earnings are as follows:
(in millions, except per share amounts) Year ended December 31, 2015 Year ended December 31, 2014
Passenger revenue $ 115 $ 55
Net income $ 61 $ 29
Net income per basic share $ 0.09 $ 0.04
Net income per diluted share $ 0.09 $ 0.04
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