It helps to understand the accounting used for Future Cruise Credits. This topic is a little dry, but it provides guidance as to how to value your Credits, and what the repayment obligations are from AMAWaterways.
ASC 606 (Accounting Standards Codification) was introduced in 2018. “ASC 606 established new rules for US companies about booking revenues, in the process creating a common standard for Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS), which means similar changes are rolling out in most other countries. At its most basic, ASC 606 mandates that revenue is recorded once a contractual obligation is met, not at the time of payment.”
AMAWaterways is not a publicly traded company, so they do not release financial statements to the public. However, the two largest cruise companies, Carnival Corporation and Royal Caribbean Cruises, are publicly traded companies. The accounting for Future Cruise Credits (included in Customer Deposits) is now tightly regulated due to ASC 606, and the wording and accounting treatment in the SEC 10-K’s is almost identical between these two companies. Therefore, there is a high probability that AMAWaterways is accounting for Future Cruise Credits in the exact same way.
From the Carnival Corporation 10-k, 2019:
Future Cruise Vouchers are included in Customer Deposits. There is no breakout for how much are Deposits versus how much are Credits. For Customer Deposits, “These advance passenger receipts remain a current liability until the sailing date. The cash generated from these advance receipts is used interchangeably with cash on hand from other sources, such as our borrowings and other cash from operations. The cash received as advanced receipts can be used to fund operating expenses, pay down our debt, make long-term investments or any other use of cash.”
What does this mean? The Cruise Company can use your Credit for any purpose they choose. It is equivalent to a loan.
Sources and uses of Cash; Future Commitments; Payments Due by Year: “Represents cash outflows for certain of our long-term liabilities which can be reasonably estimated. The primary outflows are for estimates of our compensation plans’ obligations, crew and guest claims and certain deferred income taxes. Customer deposits and certain other deferred income taxes have been excluded from the table because they do not require a cash settlement in the future.”
What does this mean? AMAWaterways states on their Future Cruise Credits that, “This credit has no cash value.” Therefore, from an accounting perspective, a Credit is a loan that can be classified with no cash repayment obligation. This makes a Credit much more valuable to the Cruise Company than a conventional bank loan.
And what happens to your Credits in the event that AMAWaterways goes bankrupt? According to Robert M. Lawless, a law professor at the University of Illinois, in a Chapter 11 bankruptcy, consumers with Credits are 7th in line to be paid back, after secured lenders like banks, and after the next 5 other creditors. Since the Credit has no cash value, the probability of having any money left after the secured lenders are paid off is very low.
AF-1’s contract states, “an extension or a refund equal to the original amount paid to AmaWaterways may be requested.” That does not mean that AMAWaterways will automatically refund your money. You will have to remember to ask for it. There is no data on how many of these Credits expire worthless because the customer didn’t understand the language, or didn’t remember, but I will bet the number is pretty high.
Let’s recap the Future Cruise Credit contract:
What AMA Waterways gets:
A 2 year loan of your money
No loan cancellation or early repayment restrictions
Better loan terms than can be obtained from a conventional loan
No interest or compensation required to be paid to the lender (you)
No cash value obligation to the lender (you)
Restrictions on what you can use the Credits for (not with promotions)
Very low priority obligation to have to repay you in the event of a Chapter 11 bankruptcy
Some likelihood that the Credit will expire without redemption, in which case they can book the entire loan as revenue
What You get:
A 2 year loan you are forced to give to AMAWaterways
No interest or compensation on your money
No cash value
The loan is not transferable
You cannot sell the loan, or use it as collateral
Very low probability of repayment in the event of AMAWaterways bankruptcy
Repayment at the end of 2 years only if you remember to request it.
From an accounting point of view, the contract is extremely unequal, and tilted overwhelmingly in favor of AMAWaterways.
COVID19 has fundamentally changed the Future Cruise Credit contract. Prior to COVID19, using a Credit could be considered like the old adage, “You miss one streetcar, you catch another.” In other words, if you have to cancel (or be cancelled), you can always use the Credit on the next cruise.
The problem now is that it has been 6 months, and there have been no new cruises, with no visibility as to when they might resume. A COVID19 vaccine could be years away. And the probability of a bankruptcy of AMAWaterways is much higher than before.
The Future Cruise Credit is simply a rotten deal, made even worse with the COVID19 situation.
I want my money returned from AMAWaterways.