Harvard Case - JetBlue and the New Revenue Recognition Standard
"JetBlue and the New Revenue Recognition Standard" Harvard business case study is written by Emily Booth, Elizabeth Blankespoor, Jaclyn C. Foroughi. It deals with the challenges in the field of Accounting. The case study is 12 page(s) long and it was first published on : Jul 1, 2017
At Fern Fort University, we recommend that JetBlue Airways implement a comprehensive strategy to address the challenges posed by the new revenue recognition standard (ASC 606). This strategy should encompass a multi-faceted approach, including: * Adjusting accounting procedures and policies: Updating accounting systems and processes to comply with ASC 606.* Investing in technology: Implementing new software and tools to automate and streamline revenue recognition processes.* Training employees: Educating employees on the new standard and its implications for their roles.* Communicating with stakeholders: Providing clear and transparent information to investors, customers, and other stakeholders about the changes to JetBlue's revenue recognition practices.* Monitoring and evaluating: Continuously monitoring the impact of the new standard and making adjustments as needed.
2. Background
JetBlue Airways, a low-cost carrier, faced the challenge of adapting its accounting procedures and policies to comply with the new revenue recognition standard (ASC 606). This standard, effective in 2018, significantly changed how companies recognized revenue, particularly in the airline industry. The case study highlights the complexities of implementing ASC 606, including the need for accurate cost allocation, revenue recognition timing, and potential impact on financial statements.
The main protagonists of the case study are:
- JetBlue's management team: Responsible for navigating the complexities of the new standard and implementing necessary changes.
- JetBlue's accounting team: Tasked with understanding and applying ASC 606 to the airline's specific operations.
- JetBlue's investors: Concerned about the potential impact of the new standard on the company's financial performance and profitability.
3. Analysis of the Case Study
The case study can be analyzed through the lens of financial accounting and management accounting.
Financial Accounting:
- ASC 606: The new standard requires companies to recognize revenue when control of goods or services is transferred to the customer. This is a significant departure from the previous revenue recognition rules, which focused on the point of sale.
- Impact on Financial Statements: The implementation of ASC 606 can have a significant impact on a company's financial statements, particularly the income statement and balance sheet. Changes in revenue recognition timing can affect revenue and net income, while the allocation of costs can impact the balance sheet through changes in assets and liabilities.
Management Accounting:
- Cost Accounting: ASC 606 requires companies to accurately allocate costs to specific revenue streams. This necessitates a robust cost accounting system that can track and allocate costs effectively.
- Activity-Based Costing (ABC): ABC can be a valuable tool for allocating costs under ASC 606. By identifying and tracking the activities involved in generating revenue, ABC can provide a more accurate and detailed cost allocation, improving the reliability of revenue recognition.
- Budgeting and Variance Analysis: The implementation of ASC 606 requires careful budgeting and variance analysis to track the impact of the new standard on financial performance. This involves comparing actual revenue and expenses to budgeted amounts and investigating any significant variances.
4. Recommendations
To effectively implement ASC 606, JetBlue should consider the following recommendations:
- Develop a Comprehensive Implementation Plan: JetBlue should develop a detailed plan outlining the steps required to implement ASC 606. This plan should include timelines, responsibilities, and resources needed.
- Review Existing Accounting Procedures and Policies: JetBlue should thoroughly review its existing accounting procedures and policies to identify areas that need modification to comply with ASC 606. This includes reviewing revenue recognition criteria, cost allocation methods, and internal controls.
- Invest in Technology: JetBlue should invest in new software and tools to automate and streamline revenue recognition processes. This can include systems for tracking customer contracts, allocating costs, and generating revenue reports.
- Train Employees: JetBlue should provide comprehensive training to its employees on the new standard and its implications for their roles. This training should cover the key principles of ASC 606, its impact on accounting procedures, and the use of new technology.
- Communicate with Stakeholders: JetBlue should communicate clearly and transparently with investors, customers, and other stakeholders about the changes to its revenue recognition practices. This communication should explain the reasons for the changes, the potential impact on financial statements, and the company's commitment to compliance.
- Monitor and Evaluate: JetBlue should continuously monitor the impact of the new standard and make adjustments as needed. This includes tracking changes in revenue recognition, analyzing financial performance, and evaluating the effectiveness of the implementation plan.
5. Basis of Recommendations
These recommendations are based on the following considerations:
- Core competencies and consistency with mission: JetBlue's core competency lies in providing affordable and reliable air travel. Implementing ASC 606 in a way that ensures accuracy and transparency aligns with this mission by fostering trust with investors and customers.
- External customers and internal clients: The recommendations consider the needs of both external customers (investors) and internal clients (employees). Clear communication with investors builds trust and confidence, while training employees ensures smooth implementation and compliance.
- Competitors: JetBlue needs to consider the competitive landscape and ensure that its implementation of ASC 606 is aligned with industry best practices. This helps maintain a level playing field and avoids potential competitive disadvantages.
- Attractiveness ' quantitative measures: While the case study doesn't provide specific financial data, the recommendations aim to improve the accuracy and reliability of financial reporting, potentially enhancing JetBlue's financial performance and attractiveness to investors.
- Assumptions: The recommendations are based on the assumption that JetBlue has the resources and commitment to implement ASC 606 effectively. They also assume that the company will prioritize transparency and communication with stakeholders throughout the process.
6. Conclusion
The implementation of ASC 606 presents significant challenges for JetBlue Airways. However, by adopting a comprehensive strategy that includes adjusting accounting procedures, investing in technology, training employees, communicating with stakeholders, and monitoring the impact of the new standard, JetBlue can successfully navigate this transition and maintain its financial integrity.
7. Discussion
Other alternatives to the recommended approach include:
- Delaying implementation: This option could be risky, as the new standard is mandatory. It could also lead to potential penalties and reputational damage.
- Outsource implementation: While this option could save time and resources, it might not be feasible for a company like JetBlue, which needs to ensure internal understanding and control over its accounting practices.
Key risks associated with the recommended approach include:
- Cost of implementation: Implementing ASC 606 can be costly, requiring investments in technology, training, and staff resources.
- Complexity of the standard: The new standard is complex and requires significant expertise to understand and apply correctly.
- Potential impact on financial performance: Changes in revenue recognition timing and cost allocation can impact financial statements and potentially affect profitability.
8. Next Steps
JetBlue should implement the recommendations outlined in this case study solution in a phased approach. The following timeline and key milestones can serve as a guide:
- Phase 1 (Short-Term):
- Within 3 months: Develop a comprehensive implementation plan.
- Within 6 months: Review existing accounting procedures and policies.
- Within 9 months: Begin training employees on ASC 606.
- Phase 2 (Medium-Term):
- Within 12 months: Invest in new technology to automate revenue recognition processes.
- Within 18 months: Begin communicating with stakeholders about the changes to revenue recognition practices.
- Phase 3 (Long-Term):
- Ongoing: Monitor the impact of the new standard and make adjustments as needed.
- Ongoing: Continuously evaluate the effectiveness of the implementation plan and make necessary improvements.
By following these steps, JetBlue can successfully implement ASC 606 and ensure its financial reporting remains accurate, transparent, and compliant with current accounting standards.
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Case Description
In May 2014, the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) issued a converged standard on revenue recognition (ASC Topic 606 and IFRS 15, respectively) aimed at ameliorating difficulties associated with determining when to recognize revenue and at what amount. Prior revenue recognition standards applied broad concepts together with a variety of requirements for specific industries or types of transactions, sometimes resulting in divergent accounting for economically similar transactions. In contrast, the new standard outlined a single comprehensive model to use in accounting for revenue from contracts with customers. Although the new standard simplified the guidelines down to one framework, it also generally required firms to use more judgment and estimation than prior guidance. In its second quarter of 2014 financial statement filed with the Securities and Exchange Commission (SEC) in August 2014, New York-based airliner JetBlue Airways Corporation (JetBlue) [NASDAQ: JBLU] acknowledged the new revenue recognition standard. While it had yet to determine the full impact of adoption, changes were imminent. This case examines how companies' accounting practices are affected by broad-based new accounting standards. It is designed to introduce the new revenue recognition standard, and help students walk through an assessment of how the standard might impact a company like JetBlue Airways.
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