IFRIC May 2007

The IFRIC completed its redeliberation of draft Interpretation D20 Customer Loyalty Programmes, considered a revised draft of the Interpretation and, subject to drafting changes, directed the staff to present the revised draft to the Board. The final Interpretation will be presented to the Board for ratification at its meeting in June, with the intention that it will be issued in July and become effective for financial periods beginning on or after 1 January 2008.

Before approving the Interpretation, the IFRIC reconsidered the proposal in D20 that revenue should be allocated between goods or services sold and the award credits by reference to their relative fair values. It decided that the Interpretation should require the revenue allocated to the award credits to be measured by reference to their fair values (rather than cost).

However, the Interpretation should not preclude an allocation method in which the amount allocated to the award credits is equal to their fair value, with the residual consideration being allocated to the other goods and services. This latter method could be simpler to apply and be justified on practical and materiality grounds.

The IFRIC also considered aspects of the drafting of the revised Interpretation. It directed the staff:

• to express the revenue recognition requirements in more straightforward terms. If the entity supplies the awards itself, revenue should be recognised when award credits are redeemed and the entity fulfils its obligations to supply the awards. If a third party supplies the awards and the entity assesses that it has collected the consideration allocated to award credits as an agent for that third party, revenue should be recognised when the third party becomes obliged to supply the awards.
• to review the wording throughout the Interpretation to ensure that it does not imply that award credits need to be accounted for on an individual transaction-by-transaction basis. Varying degrees of aggregation by the accounting period in which such awards are generated may be appropriate depending on the circumstances.
• to explain in the Basis for Conclusions that the requirements have been worded to accommodate award credits granted by credit card providers. For some sales transactions in which award credits are granted, the credit card provider would receive consideration from an intermediate party (the retailer accepting payment by credit card), not the customer. Some of this consideration would be allocable to the award credits.
• to simplify the illustrative examples, and focus in particular on illustrating when revenue should be recognised if award credits are provided by third parties. The examples should apply whether or not the entity acts as an agent for the third parties and not focus on the presentation of that revenue.

The IFRIC decided not to include any specific disclosure requirements in the Interpretation. It decided that the requirements of IAS 1 Presentation of Financial Statements to disclose significant accounting policies and the key assumptions, estimates and judgements underlying them were sufficient.

The IFRIC reaffirmed its previous decision not to include specific transitional arrangements. As a result, the requirements of IAS 8 will be applicable—changes in accounting policy will be accounted for retrospectively except to the extent that retrospective application is impracticable. Reversing a previous tentative decision, the IFRIC decided not to include a statement in the Interpretation that if an entity had previously accrued the costs of supplying awards, it would be changing an accounting policy when it first applied the Interpretation. The IFRIC agreed with the staff view that, in straightforward cases, this conclusion would be obvious, whilst in more complex situations, the judgement would depend on the facts of the case.

The IFRIC decided that re-exposure of the draft Interpretation was not necessary. The overall approach and main requirements proposed by D20 had not changed. The most significant changes were the addition of illustrative examples and further guidance to clarify the requirements, which had been added at the request of commentators.

Finally the IFRIC discussed the effective date. It acknowledged that application of the Interpretation could require entities to undertake systems changes and took the view that the lead-in time should be longer than the usual 90 days. It therefore decided that the Interpretation should be effective for accounting periods beginning on or after
1 January 2008.