A:

Airline revenue adjustments for air traffic liability are simply part of the accrual accounting method that airlines commonly use. Revenues are adjusted at the time of ticket sales in recognition of the fact that the airline has thereby incurred the liability of providing the service paid for – the flight.

Air traffic liability is part of the revenue recognition process for airline companies. The airline industry typically operates on relatively small profit margins, so revenue recognition is one of the most important practices for airlines. The manner in which passenger and freight revenues are recorded in accounting is generally consistent among the various airlines. The guiding principle in regard to air traffic liability is that revenues are only recognized in accounting when the airline's service is actually provided.

Airline tickets or freight bills are commonly sold and issued well in advance of the flight, making the money received for them at that point in time unearned revenue. The common accounting practice in the industry is to defer this revenue and initially designate it as a liability on the airline's balance sheet. When the flight service is eventually provided, the revenue then becomes earned revenue recognized in the airline's profit and loss. At the point when revenue is recognized in profit and loss, air traffic liability is correspondingly reduced.

The balance of air traffic liability fluctuates seasonally and according to the amount of ticket sales. In addition to representing tickets and freight bills for future flights, air traffic liability adjustment includes an estimate for possible future ticket refunds for past flights. This air traffic liability aspect involves some subjective judgment by the airline in its estimation, since it is impossible to know precisely in advance what amount of tickets will be refunded or exchanged.

The estimates are commonly based on the airline's historical experience and on seasonal patterns. Estimates are also made in regard to the number of unused tickets that will eventually be forfeited. Because unused tickets are often eligible for exchange for an extended time period, revenues received for them must remain part of the air traffic liability calculation until the time period for exchanges has expired and the tickets are recognized as forfeited.

Taxes and fees that airlines have to pay are another element in the air traffic liability equation. Airline ticket prices typically include such things as transportation taxes, fees for airport facility and security charges, and taxes related to foreign travel. Because the airline company only acts as a collection agent for these taxes and fees, and it does not retain them, the airline does not record them as revenue. Instead, they are initially recognized as a liability at the time a ticket is sold. When the airline renders payment to the appropriate entity, the liabilities are accordingly reduced in the airline's accounting records.

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