IFRS - Customer Loyalty Programmes, tell me what it says?

Wednesday, September 1, 2010

Due to busy season, I was almost unable to continue posting articles...
Now onwards i ll make sure u people get at least 1 every week...

Hereunder goes the hint...


IFRIC 13 talks about Customer Loyalty Programmes

Before going to hardcore definition lets generalise the concept...

You would have heared about following incentives awarded to customers by entities:

  • "Air Miles" by Airlines
  • "Petro Points" on Petrol Card
  • "Credit voucher" for valued customers
  • "Cash Back" for use of Credit or Debit (ATM) cards
These all are Loyalty points that are awarded to customer on purchase of goods or services.

These points are:
  • awarded by entity or a third party, and
  • can be redeemed by customers immidiately, or after specific limit,
  • in form of free or discounted goods or services from the entity or at third party.

Now issue arises that how to consider Revenue in such cases under IAS 18.

Para 13 of IAS 18, Revenue Recongnition says to recognise Revenue in two parts:
  • Revenue - Sale portion, which forms part of Income
  • Deferred Revenue - Sale portion related to credit points, which is regarded as Liability
Here Deferred Revenue is to be considered as liability being entity is liable to pay to customers, in indirect cash or kind e.g. discounted or free services, in future.

Technicality arises in measurement of Deferred Revenue.

Deferred revenue should be fair value of Loyalty points awarded which is:
  • Equivalent to market value of goods or services awarded under Loyalty Points
  • Reduced by value of Loyalty Points expected as not to be redeemed...
More details on Loyalty Points will be covered in next article... (continued...)


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