Most businesses believe that they operate differently than their competitors. Perhaps they think that they have found a better way to do business either for more revenue or they have operational processes that are better.
Or perhaps it is only a perception that they operate differently or better when in practice, they are doing the same thing as everyone else. However, in travel, it does seem to be very different. One TMC usually operates very differently than another. That could be due to the multitude of systems it uses or maybe their clients are asking very unique requests. But when it comes to accounting for air tickets, it seems we mostly do it the same way.
We are fascinated when we do something different but we are not sure why we do it differently. Certain parts of the world drive on the left side of the road, others on the right side. Possibly a quick Google search would give the history on why that is. However, other processes or workflows may not be as obvious as to why we do the things we do. Computer programming and accounting can fall into that category.
As an example, if one were operating a retail store where they are paying rent but chose to pay rent ahead of time for some reason. Perhaps it is discounted or it might be more aligned with my cash flow at that time. If one pays rent now for the month of April as an example, that accounting entry would be a prepaid expense now (January) and then when April happens it would be moved to an expense. Essentially once the asset in this case, rent, is consumed it is moved to an expense. And that makes sense, it is expensed when it is used. If it was paid ahead of the time it is to be used, it’s a prepaid: except for travel.
Why do we suggest it is not done that way in travel? Well, let’s be more specific, it is only airline tickets that are done that way. If it is February and I have a flight mid April, I would expense this right away to be reimbursed for my corporate travel as soon as possible. But if we were to follow the logic for other types of expenses, this should be considered a prepaid expense and not an expense as we haven’t consumed the service yet; we haven’t traveled.
a deeper look into Travel accounting
We decided to dig a little deeper on this and asked a number of accountants on how air travel is accounted for in their businesses. The answer was always, “expensed”. Then we go on to speak of prepaid examples of either rent or insurance to frame the process for other services and obtain their insight on why would airline tickets be different?
Unfortunately, there were no clear answers. Some said that “it’s the way it’s always been done”. Others said that airline tickets were not significant enough in order to be accounted for as prepaid. The response on significance could be a reasonable explanation as to why air travel is accounted for in that manner. However we also know that travel is the 2nd highest expenditure (pre-pandemic) for most businesses so we feel that isn’t the underlying reason.
Could it be that airline tickets are difficult to track? We could assume that on the travel date the airline ticket could move from a prepaid expense to an expense but that isn’t done. Or perhaps we do not want to do that because the ticket could potentially become an unused ticket or credit? There are many providers within the industry that have wonderful tools for tracking unused tickets. And during the pandemic there were a lot of tickets that became unused and were tracked in these systems. With some companies, the value of those unused tickets was quite significant. How do companies value those unused tickets? Since the ticket is already expensed, it’s more or less like a sunk cost and it’s now off their books. However, while the unused tickets have value, unfortunately they would no longer be accounted for within a corporate GL system.
The result of this initial research is that there is no answer. Airline tickets are expensed and that is the way it is.
Time for a change?
However, it makes one wonder - is there a better way? And perhaps the first step would be to account for airline tickets as prepaid rather than a straight expense. There could be a value in having it accounted for within a corporate accounting system as it has a different level of visibility under the due diligence of the corporate accountant. It is their employer’s money after all. Since we are coming out of a pandemic with possibly fewer unused tickets, is now the time to change the way we account for air travel?
Maybe there is some sort of reasoning under either Generally Accepted Accounting Principles (GAAP) or International Financial Reporting Standards (IFRS). We welcome your thoughts and comments on this topic. Perhaps there are some that do record as a prepaid? Please reach out to us with your thoughts and comments either way.