$2,446M Missing Miles

Discussion in 'American Airlines | AAdvantage' started by Aloha-Rick, Apr 29, 2013.  |  Print Topic

  1. Aloha-Rick

    Aloha-Rick Silver Member

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    New AA's S-4 proforma Balance Sheet on page 147 (page 161 of 562 pages)
    combines $6.1B AA miles + $1.1B US miles for $4,753M miles vs $7,199M.

    $2,446M miles are missing, despite being issued and outstanding by AA +US,
    not shown as Current (1 year) or Long-Term (over 1 year) Deferred Revenue.

    AAdvantage adopts deferred revenue accounting at the exit,
    recognizing revenue as miles are redeemed or lost in breakage,
    so they should recognize it as broken or defer it as outstanding.
     
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  2. TheBeerHunter
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    TheBeerHunter Silver Member

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    As a non-accountant type, what does this mean to me? That they're just lying about what's outstanding, or...?
     
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  3. jbcarioca
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    jbcarioca Gold Member

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    No lies. They're changing the accounting rules to harmonize the two companies and taking the opportunity to reduce the accounting impact of the contingent liabilities. The changes have no operating effects at all. Generally in markers the entities want to clean up the balance sheet as much as they can. This is an easy way to do that.
     
  4. newbluesea
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    newbluesea Gold Member

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    Actually in my case I would have stopped at your first sentence (and perhaps added.. "why should I care?" ):)
     
  5. jbcarioca
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    jbcarioca Gold Member

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    Right. Nobody cares unless they own shares in one or both of the companies, or is an accountant...or are generally compulsive like me and try to know lots of useless trivia.
     
  6. Aloha-Rick

    Aloha-Rick Silver Member

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    If AA considers the $2,446M broken, they should have recognized the revenue, but they did not recognize it.
    Members still hold $2,446M miles that may break, but with no deferred value AA gets no revenue recognition.
    AA cut liabilities by $2,446M and that value of miles went away as breakage, yet accounts show the same miles.

    34% of AA + US miles just disappeared, one-third of the total issued and outstanding, in their new accounting.

    It improved the proforma balance sheet, yet members still hold the miles so they may be spent and not all break.
     
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  7. newbluesea
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    newbluesea Gold Member

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    Of course there are more important things to worry about .. like who is going to win the Kentucky Derby on Sat and at what price.:D
     
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  8. jbcarioca
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    jbcarioca Gold Member

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    There are basic essential tenets of life and there are interesting trivia. it is good taht you are grounded in the basics.:D
     
  9. Aloha-Rick

    Aloha-Rick Silver Member

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    Revolutionary in the Derby with Calvin Borel on the inside, two recent wins, trained by Todd Pletcher to win again.
     
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  10. HaveMilesWillTravel
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    HaveMilesWillTravel Gold Member

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    And there I thought someone had 2.4 million miles missing from their account... :D
     
  11. Aloha-Rick

    Aloha-Rick Silver Member

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    One-Third (34%) of All Miles are Missing. That will affect a lot of people, or none if they quietly break over 2 years.
     
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  12. Mike Reed

    Mike Reed Gold Member

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    They're not missing. They were revalued. :)

    Sent from my iPhone using milepoint
     
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  13. jbcarioca
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    jbcarioca Gold Member

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    Technically they were not even revalued. The breakage assumptions changed, so reducing the estimated liability. To have been revalued they'd ned to make other changes taht would alter the cost per point sold and/or redeemed, and they did not do that, if I read the data correctly. .
     
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  14. Mike Reed

    Mike Reed Gold Member

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    I stand corrected and defer to the [obvious] expert. Good contribution... :)
     
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  15. DestinationDavid
    Original Member

    DestinationDavid Milepoint Guide

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    If you ever want to know something about an obscure subject, ask jbcarioca. He's constantly surprising me with what he comes up with.
     
  16. jbcarioca
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    jbcarioca Gold Member

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    All hail Google, Cardweb, FASB and my incredible good luck with relevant client assignments. That said, the more obscure the more likely I'll know about it...except for sports of course.
     
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  17. Aloha-Rick

    Aloha-Rick Silver Member

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    Revalued with Happy Face was intended as Fun (in my opinion) ...
    17% Annual Breakage for the Next Two Years covers the 34%.
    No change to assumptions, but they cut the 34% in advance, rather than over next 2 years (cost $2,446 recognized)

    Proforma cut $435M from US liabilities ($177M costs +$258M for miles sold to partners) and new AA proforma
    Recognized $1.1B US with $230M Current +$879M Long Term, adding $1.1B US to AA's $6.1B (short by $2,446M).

    AA added $2.2B Long Term and cut $244M Current, but is still $2,446M under their $6,100M issued and outstanding.

    If members spend their (est breakage) miles with New AA, they are phantom miles missing from the balance sheet.

    One Third (34%) of AA + US miles are missing, already broken, and theoretically will not or cannot be spent.
     
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  18. jbcarioca
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    jbcarioca Gold Member

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    Not really. breakage is an assumption regarding expected value and does have precisely zero effect on miles accrued. It is ONLY a redemption assumption, nothing more. Nothing is "short". In addition they are not "missing from the balance sheet". This is closely related to loan impairment, which assumes loans will not be repaid in full. the loan remains outstanding and is a legal obligation, as are those miles. However, they both are valued at a lower level for balance sheet purposes because their expectations differ from the actual balances.

    Please be cautious with words like "phantom" or "short" which imply they did something wrong. They did not, no issues, and the frequent flyer community is 100% unaffected by these issues.
     
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  19. newbluesea
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    newbluesea Gold Member

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    As one of five Pletcher runners (a trainer who is 1 for 31 in the Derby) hes not without a chance but unless he leads from the 3 draw Borel ( who is not among the current top riders) will be hard pressed to get a clear run on the rail.

    I see the race between Orb, Verrazano, Goldencents and Itsmyluckyday (who I am currently leaning towards).
    Live longshot:Charming Kitten.
     
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  20. Aloha-Rick

    Aloha-Rick Silver Member

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    Thank You and Yes, members should be OK when they spend miles in their accounts (miles belong to AA / US).
    Brands are required to carry a value equal to redemption fair value, and recognize revenue when spent or broken.
    The proforma cut the next two years of expected breakage, and reduced AA miles issued by $2,446M (a lot of miles).
     
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  21. jbcarioca
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    jbcarioca Gold Member

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    A few points.
    First, there is no obligation for a "brand" which is usually carried on a balance sheet at no value, or if acquired, at acquisition price.
    Second, the 'fair value' is not strictly redemption value, but expected value, which sometimes differs substantially from redemption value.
    Third, redemption does not normally involve revenue recognition, but a debit to the relevant points account and a credit to COGS, or the equivalent account.
    Fourth, breakage, depending on the specific accounting definition, amy not involve income recognition either, but a reduction in contingent liability with no equivalent income recognition. Breakage does require income recognition in such cases as legacy Nectar, when breakage is the sponsors property and participants do not benefit, so they paid Nectar for broken points. Many major participants in other programs participate in breakage thus reducing their cost per point.

    Because all this is quite technical the accounting references deal with precedents in semi-analogous situations. The simplest explanations I know of can be found in a Well fargo response to the FASB. It is attached if anybody is anal-compulsive enough to read it:
    http://www.fasb.org/cs/BlobServer?b...here=1175823786771&blobheader=application/pdf
     
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  22. Aloha-Rick

    Aloha-Rick Silver Member

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    Thanks for the Comments and Link. Any issuer of miles or points etc (any bank or brand) must account for them at the fair value for redemption, this year (current) or next year plus (long term) and recognize the revenue at redemption.

    This thread asked why break two years of miles (34% or $2,446M) in advance and not recognize the revenue,
    while keeping the $2,446M miles in accounts that people might spend and AA will honor for awards redeemed.

    Wells Fargo says recognize interchange when earned, costs when spent, award fair market value at redemption.
    That matches FASB 605 and IFRIC-13 except interchange rewards (WF calls the 1% rewards more like rebates).
    The FASB stayed with loyalty example 24 vs 10 (rebates) and issuers recognize ~10% as marketing costs upfront.

    AA cleaned up the balance sheet and members hold 34% more miles than AA says they expect to redeem over time.
     

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