IFRIC January 2007

The IFRIC considered comments received on Draft Interpretation D20 Customer Loyalty Programmes, which had been published for comment in September 2006. In particular, it considered comments on the overall approach and scope of the proposed Interpretation.

Overall approach

The IFRIC noted that the overwhelming majority of commentators agreed that there was a need for an Interpretation addressing ‘points’, ‘air miles’ and other award credits that entities grant to customers when they buy goods or services. However, opinion was divided on what the accounting treatment should be. Some commentators supported the D20 proposal that revenue should be allocated to the award credits and recognised only when the entity fulfilled its obligation to supply the awards. Others took the view that the entity should instead accrue the costs of supplying the awards, arguing in particular that:

n loyalty awards are in substance marketing expenses incurred to induce the initial sale. They should therefore be treated as costs associated with the sale of the goods or services, not separate components of the sale.

n the fair value of the award credits cannot always be measured reliably. The proposed approach would be complex to implement and would not produce better quality or more useful information. The costs would exceed the benefits.

A third group thought that the accounting treatment should depend on the nature of the scheme. For example, revenue deferral would be appropriate if the entity supplied the awards itself in the course of its ordinary activities, whereas cost accrual would be appropriate if the awards were supplied by a third party.

The IFRIC considered the arguments made by those opposing the D20 approach. It decided to retain the overall approach but amend the draft Interpretation where possible to address some of the commentators’ comments:

• by explaining more fully in the Basis for Conclusions the factors that distinguish award credits within the scope of the Interpretation from marketing expenses. Marketing expenses are incurred independently of a sales transaction, to secure that transaction. Award credits are part of the sales transaction itself: customers have paid consideration and there is an outstanding obligation.
• by clarifying in the Consensus (perhaps including an illustrative example) the accounting consequences if the entity immediately lays off the obligation to a third party. The entity would immediately recognise the revenue associated with the award credits and the amount payable to the third party (whether the revenue and amounts payable would be recognised gross or net would depend on whether the entity was acting as agent or principal, which would be discussed at a future meeting).
• by addressing cost/benefit issues in the Basis for Conclusions. Members acknowledged that there might be system costs, but noted that most of the variables that have to be estimated to measure the amount of revenue to allocate to award credits (eg timing of redemption, forfeiture rates etc) also have to be estimated to measure the future cost of fulfilling the obligation. They also noted that the benefits of the D20 approach include enhanced comparability—entities will measure customer loyalty performance obligations on the same basis as other performance obligations.

Scope

The IFRIC noted that the Interpretation was being regarded as applying more widely than intended. It decided to reword the scope paragraph (and perhaps also the title) to clarify that the Interpretation applies only to award credits that are granted to customers as part of a sales transaction, and not to other types of loyalty scheme. It does not apply to any incentives offered to potential customers in the absence of a sale.

The IFRIC also considered suggestions that the scope of the draft Interpretation should be expanded to address award credits that entities sell separately, either to their own customers or those of other vendors. It decided not to expand the scope to include such transactions. The reason was that the purpose of the Interpretation is to clarify that award credits granted with the sale of other goods or services are separately identifiable components of the sale. This issue does not arise if award credits are sold separately.

Next steps

The IFRIC will consider at a future meeting comments on the way in which D20 applies the separate component approach (eg how consideration is allocated between components and when it is recognised as revenue). Transitional arrangements and the effective date also remain to be considered.