Tour operators: principal or agent

Is a tour operator a principal or an agent?

IFRS 15 asks whether the company controls each specified good or service before it is transferred to the customer. For a package holiday, the specified service is usually the combined package: the company integrates flights, accommodation and transfers into one holiday at one price and is responsible to the traveller for delivering it. Indicators of control are primary responsibility for the holiday, inventory risk, such as committing to rooms and seats before they are sold, and discretion in setting the price. See principal versus agent and hospitality accounting.

Tour operator revenue: a package and an online booking

A tour operator sells a seven-night package for US$ 1,200. It has chartered flight seats at 400 a passenger and contracted a block of hotel rooms at 500 a week, paying for them whether or not they are sold, and buys transfers at 50. Separately, an online travel agency sells a traveller a seven-night stay at a hotel for 600, collecting the payment and passing 510 to the hotel after the stay; the hotel sets the room rates and can withdraw rooms, and the agency carries no unsold rooms.

The tour operator is responsible for the holiday, carries the risk of unsold seats and rooms, and sets the package price, so it is a principal: revenue is 1,200 and cost of sales 950, a gross margin of 250. The online agency never controls the room: the hotel provides it, sets the price and bears the risk, so the agency is an agent and reports revenue of 90, the difference between what the traveller paid and what it passes to the hotel, even though it collected 600 in cash. Online agencies reach this conclusion under both the agency model, where the hotel collects payment and pays a commission, and the merchant model, where the agency collects payment, unless they take on inventory risk by buying rooms in advance.

When is package holiday revenue recognised?

A package holiday is a service provided over the holiday, so revenue is recognised over the travel period. For short holidays, some operators recognise revenue on departure where the difference from spreading it is immaterial. Payments received before departure are contract liabilities, and amounts paid to hotels in advance to secure rooms are prepayments, assessed for recoverability if a hotel is in financial difficulty. Agents recognise their commission when they have performed their service, but where commissions are refunded if the traveller cancels, the expected cancellations are variable consideration, so many agents recognise commission at the start of the stay or the date of travel.

What about committed rooms and seats that go unsold?

Operators that commit to blocks of rooms or charter flights for a season take the risk of empty capacity. The cost of unsold capacity is expensed as it occurs. If, before the season, the unavoidable costs of committed capacity are expected to exceed the revenue it will earn, for example after a drop in demand for a destination, the operator considers whether the contract is onerous and needs a provision under IAS 37. See onerous contracts.

What about dynamic packages?

Many online businesses now assemble packages on demand from live flight and hotel prices, without committing to capacity in advance. Whether they are principals depends on the facts: if they are responsible to the traveller for the whole package and set its price, they may be principals even without inventory risk; if each element is in substance a separate booking with the airline or hotel, they are agents for each. Consumer protection rules that make package organisers liable for the whole holiday are relevant evidence of primary responsibility.

What other revenue do travel companies earn?

Travel insurance and car hire sold alongside bookings are usually sold as agent, for a commission. Cancellation fees retained are revenue when the cancellation occurs. Incentive payments from hotels and airlines for reaching volume targets are variable consideration for the agent, recognised as the bookings that earn them occur. See airline ancillary revenue and gift vouchers and prepaid stays.

How does US GAAP differ?

ASC 606 applies the same control-based principal or agent analysis, and large US online travel companies report most of their hotel bookings net as agents, including under the merchant model, while reporting gross where they hold inventory risk, such as some package and vacation rental arrangements. See ASC 606 principal versus agent.

This guide is general information. It is not tax or legal advice for your situation.