IFRIC March 2007
The IFRIC continued its redeliberation of draft Interpretation D20 Customer Loyalty Programmes in the light of comments received.
Allocation of consideration received
The IFRIC reconsidered the proposal in D20 that the consideration received should be allocated between the loyalty award credits and other goods and services sold by reference to their relative fair values. Commentators had suggested that the amount allocated to the award credits could instead be measured purely by reference to the fair values of those award credits, with the difference between this amount and the total consideration being allocated to the goods and services already supplied and qualifying for revenue recognition. This alternative allocation method could be easier to apply in practice, and justified for customer loyalty awards on cost/benefit grounds. Overall, the IFRIC members believed that the relative fair value method best reflected the measurement objectives of IAS 18. However, some members expressed tentative support for allowing either of the allocation methods on practical grounds, provided it was clear that the consideration allocated to the award credits was based on their fair value, not cost. The IFRIC directed the staff to undertake further analysis for discussion at the next meeting.
The IFRIC decided to move the proposed guidance on estimating fair values of award credits (paragraph 7 of D20) from the Consensus to a separate appendix of Implementation Guidance. It also decided to add text emphasising that this guidance discussed only one possible method of estimating fair values. Other methods might be more suitable in some circumstances.
Recognition of revenue allocated to awards
The IFRIC considered requests for more guidance on how to apply the proposal that revenue allocated to the award credits should be recognised ‘in the periods, and reflecting the pattern, in which award credits are redeemed’. Commentators were uncertain when revenue should be recognised in respect of award credits that were forfeited, and how entities should account for changes in estimates regarding forfeiture rates. The IFRIC decided to add an example to the Interpretation illustrating how the requirements would apply in these situations. The IFRIC confirmed that the measurement of the fair value of all awards granted should reflect expected forfeitures.
Awards supplied by third parties
The IFRIC discussed situations in which the award credits are rights to goods and services provided by a third party. Commentators had requested guidance on whether and in what circumstances the entity should measure its revenue at the gross amount allocated to the award credits, or net of the amount passed on to the third party. The IFRIC decided that the Interpretation should acknowledge the need to consider this. It should highlight the need for management to assess whether the entity had collected (or would collect) the consideration on its own account (ie as the principal in the transaction) or on behalf of the third party (ie as an agent for the third party) and apply the requirements of paragraph 8 of IAS 18 Revenue accordingly. If acting as the principal, the entity would measure its revenue at the gross amount collected and recognise it in the periods in which the customer receives the goods or services awarded. If acting as an agent, the entity would measure its revenue net of amounts passed on to the third party and recognise the net amount when the third party assumes the obligation to supply the awards.
The IFRIC also decided to add an example illustrating how the requirements of the Interpretation would apply to awards supplied by third parties.
Customer relationship intangible assets
The IFRIC decided to delete paragraph 11 of D20, which stated that: ‘Customer loyalty programmes may create or enhance customer relationship intangible assets. Such assets are recognised only if the recognition criteria in IAS 38 are met’. The IFRIC agreed with commentators that this paragraph was potentially confusing because the requirements of IAS 38 were such that it was unlikely that an intangible asset would be recognised. Furthermore, the paragraph was peripheral to the main issue being addressed in the Interpretation, ie whether the entity’s obligations should be recognised and measured by allocating revenue or accruing costs. The Basis for Conclusions will include a brief explanation of this change from D20.
Transitional arrangements
The IFRIC considered suggestions that the Interpretation should permit or require prospective application, because retrospective application could be impracticable for some entities. The IFRIC decided not to include any specific transitional arrangements. In the absence of such arrangements, IAS 8 would be applicable. IAS 8 requires changes in accounting policy to be accounted for retrospectively, but allows restricted retrospective or prospective application to the extent that full retrospective application is not practicable. The IFRIC also decided to clarify in the Interpretation that entities that previously had accrued the costs of supplying awards would normally be changing an accounting policy, rather than an estimate, when they first applied the Interpretation.
Effective date
The IFRIC did not reach a decision on the effective date, but stated that it was likely that the Interpretation would be issued in time for it to be effective for financial years beginning on or after 1 January 2008 at the latest.