IFRS - Recognition and Valuation of Customer Loyalty Points under IFRIC 13 (continued...)

Wednesday, September 8, 2010

Hint

(continued...)

from last post, you would have got the funda of Loyalty Points.
Now comes the recognition and measurement part.

Let's do it with following example:

In 2011, A customer buys goods worth Rs. 10,000.
Entity offers 1 Special Value Point per Rupee.
5 Points carry a value of Re. 1.
Points can be redeemed by discount in next purchase within 3 years.
It is estimated that 80% points are generally redeemed within 3 years.

Now Fair Value of Deferred Revenue is to be determined.

Let's decode the example as per IFRIC 13:

Total Value is Rs. 10000
Loyalty Points earned are 10,000
Value of Loyalty points is 10,000/5 = Rs. 2,000
Only 80% points are redeemed so obligation arises is Rs. 2,000 x 80% = Rs. 1,600

Accounting entries go as follows:

Year End 2011 - Initial Sale

Dr. Cash/Bank - Rs. 10,000
Cr. Deferred Revenue - Rs.  1,600
Cr. Revenue - Rs. 8,400


Year End 2012

Suppose 2000 points were redeemed during the year.
The value is 2000 / 5 = Rs. 400


Dr. Deferred Revenue - Rs. 400
Cr. Revenue - Rs. 400

Year End 2013

Suppose further 3000 points were redeemed during the year.
Moreover management expects redemption of 70% instead of 80% as earlier estimated.

Here a revisit to Deferred revenue is to be considered as follows:

Initial Obligation to be created as per revised estimate = 10,000 points x 70% = 7,000 points

Total points redeemed till Year End 2013 = 2,000 + 3,000 = 5,000

Revenue to be recognised till Year End 2013 = Rs. 1,600 x 5,000 / 7,000 = Rs. 1,143
Already recognised = Rs. 400
Balance to be recognised = Rs. 743

Dr. Deferred Revenue - Rs. 743
Cr. Revenue - Rs. 743


Year End 2013

Balance of 2,000 points, whether redeemed or not, are to be recognised as revenue:

Value to be recognised = Rs. (1,600 - 400 - 743) = Rs. 457

Dr. Deferred Revenue - Rs. 457
Cr. Revenue - Rs. 457

9 comments:

Ranjana arya said...

I had a different point of view. In the first year as the customer is eligible for 2000 points we will recognize the defered revenue for 2,000 points whereas the estimate is to redeemed 80%.

vikrmn.com said...

It's not that how much the customer is eligible for, but what will be the probability of future liability on the company. So estimate is to be considered any how.

Ranjana arya said...

Strongly Disagree!!!
In case our expectations stand to be wrong
& the customer claimed all the points then............?
I think we shd follow the conservative approch & not the past trend

Ranjana arya said...

Strongly Disagree!!!
In case our expectations stand to be wrong
& the customer claimed all the points then............?
I think we shd follow the conservative approch & not the past trend

Ranjana arya said...
This comment has been removed by a blog administrator.
vikrmn.com said...

Boss! Dont post thrice

vikrmn.com said...

Conservative approach says to recognise liability, not contingent liability...

More over any event occuring in future is covered by reconsideration of "Fair Valuation".

Anonymous said...

Vikram- U r right!

Anonymous said...

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