As the aviation industry continues to evolve, so do the financial reporting standards that shape how businesses account for transactions. International Financial Reporting Standards (“IFRS”), namely IFRS 15 and IFRS 16 each brought about significant changes and complex reporting challenges, which the aviation industry needs to face. These standards, which address revenue from contracts with customers and lease accounting respectively, have necessitated adjustments in financial reporting, impacting airlines and related businesses. In addition, IFRS 9 has also become relevant for the aviation industry as many businesses use hedging to manage fuel price volatility.
These changes aren’t just regulatory shifts. They’re opportunities to rethink processes, enhance financial reporting transparency and decision-making.
IFRS 15: Redefining revenue from contracts with customers
- Complexity in the recognition of ticket revenue
- Managing variable consideration
- Accounting for loyalty programmes
Complexity in the recognition of ticket revenue
Airlines often sell tickets months in advance, sometimes bundling services such as baggage, seat selection, or in-flight meals. Under IFRS 15, each of these elements must be evaluated as a separate performance obligation, requiring thoughtful allocation of pricing. This can be challenging given the variety of bundled services and frequent changes in customer preferences. When working with travel agents, the judgmental considerations will be around the “Principal vs Agent” concept.
Managing variable consideration
Flight changes, cancellations and seasonal fluctuations all impact revenue predictability. IFRS 15 expects aviation businesses to assess this variability up front and reassess regularly. This can complicate revenue recognition and requires robust systems to track and account for changes.
Accounting for loyalty programmes
Loyalty programmes are a significant part of airline business models as they drive customer retention. Under IFRS 15, a portion of ticket revenue must be deferred to reflect the value of loyalty points. This requires sophisticated estimation techniques and ongoing reassessment of redemption behaviours.
IFRS 16: Leases
Leasing is central to the aviation model. IFRS 16 has transformed how leases are accounted for on balance sheets. Lessees may be required to recognise most leases as right-of-use assets and corresponding lease liabilities. The impact of IFRS 16 may lead to significant challenges as set out below:
- Balance sheet impact
- Lease term and discount rate
- Operational and financial reporting
- Sale and leaseback arrangements
Balance sheet impact
The capitalisation of leases is leading to significant changes in the balance sheet. This increases both the value of the assets and as well as the value of the liabilities. Furthermore, it impacts key financial ratios and metrics, such as debt-to-equity ratios, which are crucial for financial analysis.
Lease term and discount rate
Aircraft leases are rarely straightforward – they may involve variable payments, extension or termination options, and service obligations. IFRS 16 demands a detailed, forward-looking approach to determine lease terms, assess the likelihood of exercising options, and estimate variable payments, all of which add complexity to financial reporting.
Operational and financial reporting
Complying with IFRS 16 isn’t just an accounting task. It’s a business-wide effort. It calls for substantial changes to accounting systems and processes. Furthermore, aviation businesses must ensure that they have the necessary infrastructure to capture lease data, perform calculations, and generate reports in compliance with this standard.
Sale and leaseback arrangements
Sale and leaseback arrangements are prevalent in the airline industry as a means of managing fleet and liquidity. Under IFRS 16, accounting for these transactions changed significantly requiring the seller-lessee to determine if a sale has occurred under IFRS 15 before derecognising the asset. If the seller determines that a sale is confirmed, the right-of-use asset and lease liability should be recognised for the leaseback.
IFRS 9: Financial instruments
The aviation sector, highly sensitive to fuel price swings, often relies on hedging strategies to protect against volatility. IFRS 9 redefines how those strategies are accounted for.
- Hedge accounting
- Disclosures
Hedge accounting
Hedging relationships must now meet strict effectiveness and documentation criteria to qualify for hedge accounting. Failure to meet these requirements can result in significant volatility in profit or loss due to the fair value movements of derivatives being recognised immediately.
Disclosures
IFRS 9 also raises the bar on disclosures. The fair value measurement of derivatives can be complex, particularly in volatile markets. Airlines must also provide extensive disclosures regarding their risk management strategies, the nature and extent of risks arising from derivatives, and the impact on financial statements.
How can we help?
Adapting to new standards isn’t just about compliance—it’s a chance to strengthen how your business operates. We bring deep industry experience, technical precision and cross-functional insight so you can navigate complexity with confidence, unlock efficiencies and move forward with clarity. of driving it.
Let’s explore what these standards mean for your business—today and tomorrow.
Contact us
