Accounting for revenue – making sure the customer program’s always right

How IFRS 15 might affect the accounting for customer loyalty and similar programs

As we summarized here, the IASB has issued IFRS 15, Revenue from Contracts with Customers, effective for annual reporting periods beginning on or after January 1, 2017 (NB this was subsequently amended to January 1, 2018). The standard is built around a five-step framework, including the key step of identifying the performance obligations in a contract – that is, all the promises in a contract to transfer to a customer goods or services that are distinct. We previously discussed the importance for an entity to determine whether the nature of its promise is a performance obligation to provide the specified goods or services itself (i.e. the entity is a principal) or to arrange for another party to provide those goods or services (i.e. the entity is an agent). This determination may, among many other things, be key to the treatment of loyalty points and similar programs:

  • “The boards observed that in some contracts in which the entity is the agent, control of the goods or services promised by the agent might transfer before the customer receives the goods or services from the principal. For example, an entity might satisfy its promise to provide customers with loyalty points when those points are transferred to the customer if:
  • (a) the entity’s promise is to provide loyalty points to customers when the customer purchases goods or services from the entity;
  • (b) the points entitle the customers to future discounted purchases with another party (i.e. the points represent a material right to a future discount); and
  • (c) the entity determines that it is an agent (i.e. its promise is to arrange for the customers to be provided with points) and the entity does not control those points before they are transferred to the customer.
  • In contrast, the boards observed that if the points entitle the customers to future goods or services to be provided by the entity, the entity may conclude it is not an agent. This is because the entity’s promise is to provide those future goods or services and thus the entity controls both the points and the future goods or services before they are transferred to the customer. In these cases, the entity’s performance obligation may only be satisfied when the future goods or services are provided.”

In the latter case, where the entity acts as a principal in such a transaction, then it accounts for the points program in the same way as for any other performance obligation contained within a contract: by allocating a portion of the transaction price to the program on the basis of its estimated relative stand-alone selling price, and then by recognizing revenue as it satisfies the obligation by transferring the promised goods or services to the customer. Before implementing IFRS 15, these programs are addressed by IFRIC 13 Customer Loyalty Programmes, which sets out a broadly similar mechanism: an entity accounts for award credits as a separately identifiable component of the sales transaction in which they’re granted, allocating a portion of the overall consideration to the credits with reference to their fair value, and then recognizing this consideration as revenue as the award credits are redeemed and the entity fulfils its obligations to supply awards. This might or might not result in materially the same treatment as what IFRS 15 sets out: differences could arise for instance with regard to the amount allocated to the points (the stand-alone selling price computed for purposes of IFRS 15 might not conform to the previous calculation of fair value) or to their pattern of recognition (IFRIC 13 specifically requires basing the amount of revenue recognized on the number of award credits redeemed, relative to the total number expected to be redeemed, but IFRS 15 doesn’t dictate such a specific formula).

Differences might also arise in situations where the entity acts as an agent in such transactions. As set out above, IFRS 15 says an entity might satisfy its promise to provide customers with loyalty points when those points are transferred to the customer, thus envisaging that the entity recognizes its fee or commission for providing the points at that time. However, IFRIC 13 says the entity in such a situation recognizes revenue when the third party becomes obliged to supply the awards and entitled to receive consideration for doing so, which might be at the time the award credits are granted, but depending on the workings of the program might be at a different point. Differences might arise here too in the amount of total consideration allocated to the program. In other situations, the points may entitle customers to choose between future goods or services provided by either the entity or by another party, causing the entity to need to consider the nature of its performance obligation, again leading to possible differences from the current approach.

Of course, only a small number of entities operate such programs, and any theoretical differences between the old and new approaches might not be material. Unfortunately, it might take a considerable amount of detailed analysis and investigation before reaching that conclusion…

The opinions expressed are solely those of the author

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