Seminar on “Customer Loyalty Programs – An IFRS Perspective”
Date: 23rd October 2010
Speaker: Mr. Anjani Kumar Khetan, CFA
Designation: Asst vice President – Finance, Cambridge Solutions Ltd
Venue: Hotel Elite, 4th Block, Koramangala, Bangalore
An evening seminar was organized on the topic “Customer Loyalty Programs – An IFRS Perspective”. The Speaker was Mr. Anjani Kumar Khetan, CFA, Assistant Vice President – Finance, M/s. Cambridge Solutions Ltd
What it is?
Customer loyalty programs represent a structured marketing effort intended to reward customers for the past purchases. Normallymembers under the program are granted 'award credits' that can be redeemed to obtain free or discounted goods and services. Further, those free goods or services can either be provided by the entity itself or by an external third party. A typical example in India is a departmental store (say, Reliance Fresh) that award reward points to its members, which can be redeemed by them in future.
Accounting pronouncement under IFRS:
Prior to June 2007 when the IFRIC issued IFRIC-13: Customer Loyalty Programs, IFRSs did not have any detailed guidance in this area and accordingly corporate practices to account for such obligations were varying. IFRIC-13 is applicable for annual periods beginning on or after 1st July 2008 with earlier application permitted.
Scope of IFRIC-13:
IFRIC-13 covers all types of customer loyalty programs, in which the award credits are granted to customers as part of the sale transaction (including awards that can be redeemed for goods or services not supplied by the entity). However, if an entity distributes 'money-off vouchers' or, any other sort of promotion that do not require an initial purchase, IFRIC-13 does not apply. Put differently, IFRIC-13 applies only when the right to obtain free or discounted goods or services is granted to customers as part of the initial sale transaction.
Accounting for award credits granted under Customer Loyalty Program:
According to the consensus in IFRIC-13:
- An entity account for award credits as a separately identifiable component of the sales transaction(s) in which they are granted (the ‘initial sale’);
- The fair value of the consideration received or receivable in respect of the initial sale shall be allocated between the award credits and the other components of the sale; and
- The consideration allocated to the award credits shall be measured by reference to their fair value, (i.e., the amount for which the award credits could be sold separately).
Put differently, the IFRIC requires that the fair value of the consideration received or receivable in respect of the initial sale shall be allocated between the (i) award credits and (ii) the other component of the sale. However, it does not prescribe an allocation method for multiple component sales. Once the allocation is determined, the amount applicable to the first component is deferred as a liability until the entity fulfils its obligation in respect of the award credits. The balance of the amount is recognized as revenue at the time of first sale.