As a result, practices have diverged. BC3 The main area of diversity concerns award credits that entities grant to their customers as part of a sales transaction, and that the customers can redeem in the future for free or discounted goods or services. The Interpretation applies to such award credits. BC4 In some sales transactions, the entity receives consideration from an intermediate party, rather than directly from the customer to whom it grants the award credits.
For example, credit card providers may provide services and grant award credits to credit card holders but receive consideration for doing so from vendors accepting payment by credit card. Such transactions are within the scope of the Interpretation and the wording of the consensus has been drafted to accommodate them.
BC5 Different views have emerged about how the entity granting award credits should recognise and measure its obligation to provide free or discounted goods or services if and when customers redeem award credits.
BC6 One view is that the obligation should be recognised as an expense at the time of the initial sale and be measured by reference to the amount required to settle it, in accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets. In support of this view, it is argued that:. Therefore the costs of the programmes are marketing expenses.
The obligation to exchange award credits for awards is not a significant element of the sales transaction. Thus, when the initial sale is made, the entity has met the conditions set out in IAS 18 Revenue for recognising revenue from that sale. Paragraph 16 of IAS 18 indicates that a selling entity can recognise revenue before it has completed all of the acts required of it under the contract, providing it does not retain the significant risks and rewards of ownership of the goods sold.
Paragraph 19 requires expenses relating to the sale, including those for costs still to be incurred, to be recognised at the same time as the revenue. BC7 A second view is that some of the consideration received in respect of the initial sale should be allocated to the award credits and recognised as a liability until the entity fulfils its obligations to deliver awards to customers.
The liability would be measured by reference to the value of the award credits to the customer not their cost to the entity and recognised as an allocation of revenue not an expense. They represent rights granted to the customer, for which the customer is implicitly paying. They can be distinguished from marketing expenses because they are granted to the customer as part of the sales transaction. Marketing expenses, in contrast, are incurred independently of the sales transactions they are designed to secure.
Paragraph 13 of IAS 18 states that:. The recognition criteria in this Standard are usually applied separately to each transaction. However, in certain circumstances, it is necessary to apply the recognition criteria to the separately identifiable components of a single transaction in order to reflect the substance of the transaction.
For example, when the selling price of a product includes an identifiable amount for subsequent servicing, that amount is deferred and recognised as revenue over the period during which the service is performed. Because loyalty awards are not delivered to the customer at the same time as the other goods or services, it is necessary to divide the initial sale into components and apply the recognition criteria separately to each component in order to reflect the substance of the transaction.
BC8 A third view is that the accounting should depend on the nature of the customer loyalty programme. The criteria for determining which accounting treatment should be adopted could refer to the relative value or nature of the awards, or the method of supplying them. BC9 The consensus reflects the second view, described in paragraph BC7. The first view paragraph BC6 applies paragraph 19 to recognise the cost of the awards at the time of the initial sale.
The second view applies paragraph 13 to identify the award credits as a separate component of the initial sale. The issue is to identify which of the two paragraphs should be applied.
IAS 18 does not give explicit guidance. However, the aim of IAS 18 is to recognise revenue when, and to the extent that, goods or services have been delivered to a customer. In the IFRIC's view, paragraph 13 applies if a single transaction requires two or more separate goods or services to be delivered at different times; it ensures that revenue for each item is recognised only when that item is delivered.
In contrast, paragraph 19 applies only if the entity has to incur further costs directly related to items already delivered, eg to meet warranty claims. In the IFRIC's view, loyalty awards are not costs that directly relate to the goods and services already delivered — rather, they are separate goods or services delivered at a later date. It can be argued that the substance of the incentives is the same, whatever their form or value.
A dividing line could lead to inconsistencies and accounting arbitrage. Particular difficulties could arise if a programme offered customers a choice of awards, only some of which would be supplied by the entity in the course of its ordinary activities. Those raising the objection argued that:.
However, it did not agree that the ongoing costs would exceed the benefits. It noted that most of the variables that have to be estimated to measure the revenue attributable to award credits such as redemption rates, timing of redemption etc also need to be estimated to measure the future cost of fulfilling the obligation. In the IFRIC's view, benefits to users will arise from customer loyalty award obligations being measured on the same basis as other separately identifiable performance obligations to customers.
BC12 IAS 18 requires revenue to be measured at the fair value of the consideration received or receivable. Hence the amount of revenue attributed to award credits should be the fair value of the consideration received for them. The IFRIC noted that this amount is often not directly observable because the award credits are granted as part of a larger sale.
In such circumstances, it must be estimated by allocating the total consideration between the award credits and other goods or services sold, using an appropriate allocation method. BC13 IAS 18 does not prescribe an allocation method for multiple-component sales. However, its overall objective is to determine the amount the customer is paying for each component, which can be estimated by drawing on the entity's experience of transactions with similar customers. Hence, the Interpretation requires the consideration allocated to award credits to be measured by reference to their fair value.
BC14 The Interpretation does not specify whether the amount allocated to the award credits should be:. The selection of one or other method is therefore left to management's judgement.
To address this, the Board amended paragraph AG2 and Example 1 in the illustrative examples. The amendment clarifies that when the fair value of award credits is measured on the basis of the value of the awards for which they could be redeemed, the fair value of the award credits should take account of expected forfeitures as well as the discounts or incentives that would otherwise be offered to customers who have not earned award credits from an initial sale.
BC15 The consideration allocated to award credits represents the amount that the entity has received for accepting an obligation to supply awards if customers redeem the credits.
This amount reflects both the value of the awards and the entity's expectations regarding the proportion of credits that will be redeemed, ie the risk of a claim being made. The entity has received the consideration for accepting the risk, whether or not a claim is actually made.
Hence, the Interpretation requires revenue to be recognised as the risk expires, ie based on the number of award credits that have been redeemed relative to the total number expected to be redeemed. BC16 After granting award credits, the entity may revise its expectations about the proportion that will be redeemed.
The change in expectations does not affect the consideration that the entity has received for supplying awards: this consideration the revenue was fixed at the time of the initial sale.
Hence the change in expectations does not affect the measurement of the original obligation. Instead, it affects the amount of revenue recognised in respect of award credits that are redeemed in the period.
The change in expectations is thus accounted for as a change in estimate in the period of change and future periods, in accordance with paragraph 36 of IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors. BC17 A change in expectations regarding redemption rates may also affect the costs the entity expects to incur to supply awards.
If estimated redemption rates increase to the extent that the unavoidable costs of supplying awards are expected to exceed the consideration received and receivable for them, the entity has onerous contracts. The Interpretation therefore highlights the requirement of IAS 37 to recognise a liability for the excess. BC18 Some customer loyalty programmes offer customers awards in the form of goods and services supplied by a third party.
For example, a grocery retailer may offer customers an option to redeem award credits for air travel points or a voucher for free goods from an electrical retailer. The IFRIC noted that, depending on the terms of the arrangement, the reporting entity the grocery retailer in this example may retain few, if any, obligations in respect of the supply of the awards.
In such circumstances, the customer is still receiving the benefits of — and implicitly paying the entity consideration for — the rights to awards. Hence, consideration should be allocated to the award credits. BC19 However, the entity may in substance be collecting the consideration on behalf of the third party, ie as an agent for the third party.
If so, paragraph 8 of IAS 18 would need to be taken into consideration. This paragraph states that:. Revenue includes only the gross inflows of economic benefits received and receivable by the entity on its own account. The amounts collected on behalf of the principal are not revenue.
Instead, revenue is the amount of commission. BC20 Depending on the terms of the agreement between the entity, award credit holders and the third party, the gross consideration attributable to the award credits might not represent revenue for the entity.
Rather, the entity's revenue might be only the net amount it retains on its own account, ie the difference between the consideration allocated to the award credits and the amount paid or payable by the entity to the third party for supplying the awards. BC21 The IFRIC noted that, if the entity is acting as an agent for a third party, its revenue arises from rendering agency services to that third party, not from supplying awards to the award credit holders.
The entity should therefore recognise revenue in accordance with paragraph 20 of IAS As the outcome of the transaction can be estimated reliably the consideration has been received and the amount payable to the third party agreed , revenue is recognised in the periods in which the entity renders its agency services, ie when the third party becomes obliged to supply the awards and entitled to receive consideration for doing so. The most significant changes made in the light of comments received relate to:.
D20 proposed that consideration should be allocated between award credits and other components of the sale by reference to their relative fair values. The IFRIC accepted suggestions that another allocation method — whereby the award credits are allocated an amount equal to their fair value — could also be consistent with IAS 18 , and would be simpler to apply. So, as explained in paragraph BC14 , the consensus has been revised to avoid precluding this latter method.
The consensus in D20 did not refer to the possibility that an entity may have collected consideration on behalf of the third party, and hence that its revenue may need to be measured net of amounts passed on to the third party. However, as some commentators pointed out, awards are often supplied by third parties and so this possibility will often need to be considered for transactions within the scope of the Interpretation.
The requirements of IAS 18 in this respect have therefore been added to paragraph 8 of the consensus and are explained in paragraphs BCBC Customer loyalty programmes may create or enhance customer relationship intangible assets. The consensus in D20 had pointed out that such assets should be recognised only if the recognition criteria in IAS 38 Intangible Assets had been met. The IFRIC accepted that this comment appeared to suggest that there would be circumstances in which intangible assets were recognised, whereas the requirements of IAS 38 were such that recognition was very unlikely.
Customer loyalty programs are used by entities to provide customers with incentives to buy their goods or services. If a customer buys goods or services, the entity grants the customer award credits i. The customer can redeem the points for awards such as free or discounted goods or services.
Skip to content. Customer Loyalty Programmes. IFRIC This Interpretation applies to customer loyalty award credits points that: an entity grants to its customers as part of a sales transaction , i. Accounting for customer loyalty programs. An entity applies the concept of multiple deliverables from IAS 18 and accounts for the customer loyalty points as a separately identifiable component of the sale The fair value of the consideration received or receivable from the sale is allocated between: the award credits points and the other components of the sale The consideration allocated to the award credits points shall be measured by reference to their fair value , i.
Comparison to ASPE. Under ASPE no specific guidance on customer loyalty program; however, based on the concept of multiple deliverables, it will likely be accounted for similarly. Spread the Word! Share on facebook Facebook.
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