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Title of BrochureSubtitle

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AssurAnce And AdvisoryBusiness services

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Customer LoyaltyProgrammesImplementation Guidance

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c u s t o m e r l o yA lt y p r o g r A m m e s - i m p l e m e n tAt i o n g u i d A n c e2

Contents

1 - Introduction 3

2 - Scope 5

3 - Allocating Consideration 6

4 - Recognising Revenue 7

5 - Determining fair value 11

6 - Onerous contracts 16

7 - Business combinations 16

8 - Deferred tax 17

9 - Disclosures 17

10 - Transition 18

c u s t o m e r l o yA lt y p r o g r A m m e s - i m p l e m e n tAt i o n g u i d A n c e 3

1 - IntroductionMany entities use customer loyalty programmes to build brand loyalty, retain their valuable customers and increase sales volumes. Programmes are generally designed to reward customers for past purchases and to provide them with incentives to make further purchases. Typically, customers purchase goods or services and earn award credits (eg, points or air miles) that can be used to obtain free or discounted goods and services. Examples range from relatively simple programmes (such as a coffee retailer that offers one free cup of coffee for every 10 cups purchased), to highly complex programmes (such as an airline frequent flyer programme that accumulates miles based on flights taken, which may be redeemed for free flights or other goods sold by the airline or by a third party). Such programmes are common in the retail, hotel, airline, consumer credit and telecommunications industries.

The programmes operate in a number of ways: customers may use the award credits as they are granted, or may be required to accumulate a minimum number of award credits before any can be redeemed. Award credits may be linked to individual purchases, groups of purchases or purchases made over a specified period of time. An entity may operate the programme itself or participate in a programme operated by a third party. The programme operator may offer goods or services that the entity supplies itself, and/or goods offered by another third party. Further complexity arises when a programme operator sells award credits to a partner, eg, a credit card company, for the partner to issue the credits to their customers who are also members of the frequent flyer programme.

In the absence of specific guidance in IFRS on accounting for the obligation relating to the redemption of the award credits, differing practices have developed. Either:

1) The cost of supplying the goods or service in the future is recognised as an expense at the time of selling the goods, giving rise to a liability. This views the programme as a marketing tool and, therefore, fulfilment of the obligation attached to the award credits is a marketing cost. Differing practices have emerged as to how cost is determined – full cost or the incremental cost; or

2) The award credit is treated as a separate component of the sales transaction that requires delivery in the future, and an element of the consideration is recognised as deferred revenue. This treatment views the issue of award credits as an exchange of economic benefits that is therefore in the nature of a sale.

Customer LoyaltyProgrammes


Under both of these approaches, differing practices have been applied to factor expected award redemption rates into the measurement of the liability.

The IFRIC considered this issue and, in June 2007, the IASB issued Interpretation 13 Customer Loyalty Programmes, applicable to financial periods beginning on or after 1 July 2008, although it may be applied earlier. The Interpretation reflects the conclusion of the IFRIC that granting award credits to customers is a separate component of the initial sales transaction with the customer. Hence, consideration is allocated between the award credits and the other components of the sale.

IFRIC 13 includes guidance on how to measure the award credit component of the sale, the timing and amount of the related revenue that is recognised in profit or loss and how this revenue is to be presented (gross or net of the costs incurred in fulfilling the obligation). The Interpretation also includes guidance on the need to recognise an additional liability should the unavoidable costs of meeting the obligation to supply the awards be expected to exceed the consideration received for them.

For entities that have previously applied a cost approach and, in particular, an incremental cost approach, and for entities that applied a revenue approach but did not account for changes in expected award redemption rates in the manner prescribed by the Interpretation, the Interpretation may result in a significant change in the point in time at which revenue is recognised.

The conclusions reached by the IFRIC are not the same as those applied under US GAAP. The Emerging Issues Task Force (EITF) discussed accounting for point and loyalty programmes, but did not reach a conclusion. Consequently, two different practices have emerged in the US, similar to the cost and revenue approaches noted above. The EITF, however, has issued more specific guidance on accounting for multi-element arrangements (EITF 00-21), which is not the same as the guidance in IFRIC 13. IFRIC 13 also differs from US GAAP in how the expected redemption rate is taken into account. An entity that is also a Foreign Private Issuer (‘FPI’) on a US exchange should carefully assess whether the application of IFRIC 13 gives rise to a reconciling item in the IFRS/US GAAP reconciliation (until such time as the Securities and Exchange Commission implements its proposal to eliminate the requirement for FPIs that prepare IFRS financial statements to include a reconciliation to US GAAP).

Even if an entity does not apply the Interpretation early, it must, to the extent practicable, disclose the impact of the Interpretation in its financial statements for years ended before 1 July 2008, as required by IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors. For large and complex programmes, initial application, as explained later in this publication, can be a very time-consuming exercise. Management should begin to determine the impact as soon as possible.


2 - ScopeThe Interpretation applies only to transactions in which an entity grants award credits to its customers as part of a sales transaction and, subject to any qualifying conditions, those customers may redeem the award credits in exchange for free or discounted goods and services.

The Interpretation applies to programmes in which the benefit offered to the customer derives from a past transaction. Consequently, it does not apply to freely distributed “money-off” vouchers or other incentives and loyalty programmes that do not require an initial purchase.

The Interpretation applies to any entity that grants award credits to its customers, regardless of whether the entity operates the customer loyalty programme itself, or participates in a programme operated by a third party, or whether the entity’s commitment will be met by the entity itself or by a third party.

When a programme operator sells award credits to another entity, and that entity then issues those award credits to its own customers, the transaction from the perspective of the programme operator is outside the scope of IFRIC 13. For example, an airline sells air miles in its programme to a credit card company, in order that the credit card company can then award the miles to its cardholders who are also members of the airline’s programme. This type of transaction is a direct sale of the award credits to a third party and therefore is within the scope of IAS 18 Revenue. As cardholders may redeem the miles directly with the airline, the airline has an obligation that must be recognised being the future delivery of the goods or services awarded in exchange for the award credits and we would generally expect that the principle of IFRIC 13 also applies, such that the revenue is deferred until the points are redeemed.

In addition to selling award credits, a programme operator such as an airline may also sell other services, such as the use of its name or the use of a customer list. Therefore, the consideration received may not relate entirely to the award credits and, hence, the consideration should be allocated to the different elements of the sale.

If a programme operator sells award credits directly to its customers, allowing them to ‘top-up’ their credits to redeem them for an award, the transaction will be outside the scope of the Interpretation. However, we would expect the principles in the Interpretation to apply, the revenue from the sale of the award credits being deferred until the award credits are actually redeemed or expire.


3 - Allocating ConsiderationAward credits offered as part of a sales transaction are accounted for as a separate component of that sales transaction, in accordance with paragraph 13 of IAS 18 Revenue. The granting of award credits is effectively accounted for as a future delivery of goods or services. Therefore, the fair value of the total consideration received in the initial sales transaction is allocated between the award credits and the sale of the goods or services. The Interpretation requires only that the amount allocated to the award credits is measured ‘by reference to’ their fair value.

IAS 18 does not prescribe an allocation method for multiple component sales. The IFRIC decided that it should not be more prescriptive in this respect than IAS 18 and allows the amount allocated to the award credits to be either:

a) equal to their fair value; or

b) the proportion of the total consideration that the fair value of the award credits represents of the total fair value of both components of the sale.

Example 1 below illustrates these two methods.

In most programmes, goods and services are sold to customers at the same price, regardless of whether award credits are granted to customers as part of the sales transaction. Therefore, where award credits that have a value are granted, this implies that the sale is at undervalue and, hence, the two methods above will give different values for the award credits. Where larger volumes are involved, the difference between the two methods may give significantly different results. Consequently, management must apply judgment to select one method as an accounting policy choice and apply this consistently.

Example 1A retailer sells goods to a customer and issues 100 award credits for a total consideration of CU1,000. Customers who are not part of the loyalty programme would also pay CU1,000 for the goods. Therefore, the retailer determines that the fair value of the goods is CU1,000.

The retailer determines that the fair value of the 100 award credits is CU50.

Applying the two approaches above, the retailer could allocate the revenue as follows:

a) equal to the fair value of the credits:

Revenue allocated to the award credits (deferred) CU50

Revenue allocated to the goods (recognised in P&L) CU950

b) based on the relative fair values: Revenue allocated to the award credits (deferred) CU48 (50/1,050 x 1,000)

Revenue allocated to the goods (recognised in P&L) CU952 (1,000/1,050 x 1,000)


4 - Recognising RevenueThe revenue related to the award credits granted is recognised in profit or loss when the risk of a claim being made expires. This generally means that consideration allocated to award credits that are expected to be redeemed, is recognised in liabilities as deferred revenue until the award credits are redeemed. Determining whether the risk in respect of unredeemed award credits has expired depends on the specific requirements of the programme, and requires consideration of some or all of the following:

1) the date by which the award credit must be redeemed;

2) whether the obligation in respect of the award credit is passed on to another entity; and

3) the point at which it becomes remote that any unused award credits will be redeemed.

The first two factors are straightforward as they are directly observable. The third factor requires management to apply a methodology that will enable them to estimate the total number of award credits expected to be redeemed. Refer to Section 5.2.2 below for further discussion of how this is determined.

Customer loyalty programmes may operate in different ways: 1) The entity granting the award credits may operate the programme by supplying products or services which it already offers to customers in the normal course of business. For example, a hotel may grant award credits to customers, who can then redeem the credits for free accommodation in the hotel.

2) The entity granting the award credits may operate the programme by supplying products or services that it does not usually provide in the normal course of its business. That is, the programme operator purchases the products or services from third parties. For example, a retail outlet may offer flights on redemption of award credits.

3) The entity grants award credits to the customer and the customer redeems them directly with a third party. For example, a credit card company grants air miles to its customers, and the customer redeems the air miles for free flights directly with the airline.

The timing and amount of revenue recognised may differ, depending on whether the entity or a third party supplies the awards.

4.1 The entity supplies the awardsAwards supplied by an entity may consist of goods or services that it supplies in the ordinary course of its business, and/or goods or services that it has purchased from third parties. For example, a grocery retailer which grants loyalty points to its programmemembers may give them the option of redeeming the points either for groceries or for a meal in a particular chain of restaurants. When, as in this example, the entity that issues the award credits retains the obligation to redeem the credits in exchange for awards, revenue is recognised in profit or loss as award credits are redeemed. The amount of revenue recognised in any one period is based on the number of loyalty award credits redeemed, relative to the total number of award credits expected to be redeemed.


The estimated redemption rate is re-assessed each period. Changes in the total amount of award credits expected to be redeemed do not affect the consideration that the entity received for supplying the awards and, therefore, the amount of revenue is not itself remeasured. Instead, changes in the total amount of award credits expected to be redeemed will be reflected in the amount of revenue recognised in the current and future periods.

This means that the effect of changes in the expected redemption rate will be recognised in revenue over the period in which other award credits are redeemed and is neither deferred until actual expiry, nor recognised up front.

The calculation to determine the amount of revenue recognised in any one period is made on a cumulative basis, in order to reflect the effects of any changes in estimates. This is expressed in the following formula:

Example 2 illustrates how this applies during the life of a programme.

Example 2An entity issues 5,000 award credits. It expects 80% of these award credits (ie, 4,000) to be redeemed, and estimates the fair value of the 4,000 award credits to be CU2,000 and defers revenue of this amount. By the end of year one, 1,500 award credits have been redeemed. The revenue recognised is:

1,500 * CU2,000 = CU7504,000

By the end of year two, a further 800 award credits have been redeemed, bringing the total award credits redeemed to date to 2,300. Management now expects 85% of the issued award credits (ie, 4,250 award credits) to be redeemed. Revenue recognised for the year is CU332 as follows:

2,300 * CU2,000 - CU750 = CU3324,250

By the end of year three, a total of 3,000 award credits have been redeemed. As there were no changes in the estimated redemption rate, revenue has been recognised in year three of CU328:

3,000 * CU2,000 - CU1,082 = CU3284,250

Therefore, cumulative revenue recognised is CU1,410, the deferred revenue balance stands at CU590 and an estimated 1,250 award credits remain to be redeemed out of the outstanding 2,000 award credits. However, during year four, the programme rules are changed and management now estimates that 1,800 of the remaining award credits will be redeemed.

* -

Award credits redeemed to date

Total award credits expected to be

redeemed

Total Revenue allocated to the award credits

Revenue recognised to date


During year four, a further 1,000 award credits are redeemed. Revenue recognised in the year is CU257.

4,000 * CU2,000 - 1,410 = CU2574,800

4.2 A third party supplies the awardsRather than operate its own customer loyalty programme, an entity may purchase award credits from a loyalty programme operator for issue to its own customers, and the customers redeem the award credits for goods or services directly with the programme operator. The entity retains no obligations in respect of the award credits other than to pay the programme operator for them.

In such circumstances, a judgment needs to be made as to whether the entity is, in substance, earning revenue, not from supplying awards to its customers, but rather from acting as an agent for the programme operator. When an entity acts as agent for a loyalty programme operator, it, in substance, collects consideration for the awards on behalf of the programme operator. In such a case, the entity deducts the amount payable to the programme operator in respect of the award credits the entity issues from the amount collected from the customer in respect of those award credits, so as to reflect in its income statement the commission earned for providing agency services. The agency service revenue is recognised by the entity when the award credits are issued, as this is the time at which the entity provides the agency service to the programme operator (and is the point at which the programme operator becomes obliged to supply the awards).

IFRIC 13 does not discuss the factors that affect the judgment as to whether revenue should be recognised gross or net. On the one hand, when awards are supplied by a third party loyalty programme operator, the third party may determine the range of goods and services for which the award credits can be redeemed as well as the number of award credits required, and the customer may have no recourse to the entity that issued the award credits but only to the programme operator. These are factors which suggest that the entity is acting as agent in a transaction between the award credit holder and the loyalty programme operator.

However, the exercise of judgment in these circumstances is a difficult issue as the transactions concerned are not typical agent-principal transactions. Although there are other cases in which a sales transaction may consist of both a sale component and an agency service component (as opposed to two sales components), in most cases, an entity that purchases award credits from third parties and issues them to its customers does so in order to enhance its customer relationships rather than to earn a margin from the sale of award credits, and can generally determine, for example, to whom it will issue award credits and in what quantities. These are factors which suggest that the entity is acting as principal in issuing award credits.


Example 3A hotel operates a customer loyalty programme in which customers are granted award points when they purchase goods and services from the hotel. Customers can redeem the points for free accommodation at the hotel, or for other products such as theatre tickets and shopping vouchers, some of which are supplied by third parties.

The hotel administers the programme and has complete discretion regarding the products that are offered in exchange for the award points. The hotel does not know which products customers will choose until the points are actually redeemed.

Applying the indicators above, the hotel is collecting revenue on its own account and is therefore the principal in the transaction for the following reasons:

1) The hotel is the primary obligor and customers have a claim against the hotel until the award credits are redeemed or otherwise expire;

2) The hotel determines the range of goods that can be exchanged for the award credits and could, at any time, decide no longer to offer the theatre tickets and shopping vouchers supplied by third parties; and

3) The hotel has complete discretion regarding the number of credits needed to obtain the free goods and services.

As the hotel is acting as principal in the transaction, revenue attributed to the award points is recognised gross. The revenue will be recognised when the risk of a claim expires as explained in Section 4.1 above.

Example 4An entity participates in FlyMore, an airline customer loyalty programme, in which customers earn air travel credits when they purchase goods or services from selected businesses, including the entity. The air travel credits can be redeemed for free air travel.

The entity determines that it is an agent for FlyMore and earns a commission for granting air travel credits to its customers. The entity pays the airline CU0.05 per air travel credit and considers that the fair value of the air travel credits is CU0.06.

A customer buys goods of CU500 and receives 100 air travel credits. The fair value of the air travel credits is (100 x CU0.06) = CU6 and the cost is (100 x CU0.05) = CU5.

The revenue is the net amount the entity retains on its own account, ie, the difference between the consideration allocated to the FlyMore credits (CU6) and the amount payable by the entity to FlyMore for supplying the air travel awards (CU5).

Therefore, the revenue recognised at the time of sale will be: CU

Sale of goods 494 Commission revenue (FlyMore agency commission) 1 Total revenue 495


5 - Determining fair valueIFRIC 13 requires the consideration allocated to award credits to be measured by reference to their fair value. IFRIC 13 defines fair value as:

‘the amount for which the award credits could be sold separately’

One of the key challenges is to determine the amount for which the award credits could be sold. Often, this is not directly observable and we expect that, in a majority of cases, fair value will need to be estimated.

5.1 When fair value is directly observableThe amount for which an award credit may be sold will be directly observable when there are significant actual sales of award credits by the entity that grants the award credits to its customers. Sales of award credits may be made directly to customers or they may be sold to third parties which then grant the credits to their own customers. When a transaction takes place between the entity and a third party, the entity will have taken account of an expected redemption rate in determining the consideration for the sale of the credits. When a programme operator sells award credits to other entities, in addition to granting award credits to its own customers, the fair value of the awards sold may differ from the fair value of the award credits granted to its own customers. Factors that may result in a different fair value include:

• Different customer profiles such that expected redemption rates differ

• The range of goods and services available for the sold award credits differs from the range available to the programme operator’s own customers

• The programme operator may sell the award credits at a discount to other entities due to the volume of award credits sold.

The consideration receivable by the programme operator for the sale of award credits may also include a marketing fee or royalty component, over and above the fair value of the award credits. In practice, however, it may not be possible to demonstrate that the total consideration exceeds the fair value of the award credits or to measure reliably the fair value of components of the sale.

Example 5An airline sells air travel credits to a credit card company for issue to cardholders when they make purchases using their credit card. The airline sells one million air travel credits to the credit card company for a total consideration of CU70,000. The airline believes it is able to measure reliably the fair value of the award credits. It determines that the fair value of the air travel credits is CU65,000 and that the balance of CU5,000 is effectively a marketing fee.

The fair value of the air travel credits is deferred and recognised as the air travel credits are redeemed. If the marketing fee is not refundable in any circumstances and the airline has no obligation to provide any further services to the credit card company, this marketing fee is recognised in profit or loss immediately.


When an entity pays a third party to supply the awards, the fair value of the award credits the entity issues to its customers may be estimated by reference to the amount paid to the third party, adding an appropriate profit margin. The payment to the third party to supply the awards will satisfy the entity’s obligation in respect of the award credits. For example, a credit card company issues air travel credits to customers when they make purchases using their credit card. The company will typically pay a fixed amount to the third party for each air travel credit issued. The fair value will therefore be the amount paid by the credit card company plus a profit margin.

Management will need to apply judgment to assess the appropriate profit margin. This must represent the margin on the award credits issued, not the profit margin that the entity expects on the sale of their goods and services. The requirements of IAS 18 Revenue will still apply in ensuring that the revenue can be reliably measured.

5.2 When fair value is not directly observableWhere there are no significant transactions to purchase or sell award credits, the fair value of award credits will be estimated by reference to the fair value of the goods and services for which the award credits may be redeemed. For small or simple programmes, such as those that offer discounts or a free product after a certain number of purchases, the estimation process may be quite straightforward. However, for larger programmes that offer a wide range of awards, the estimation process will be more complex, and a comprehensive set of data needs to be collected about the input variables.

When the amounts involved are material, a significant investment of time and effort will often be required to establish a model that provides a reliable estimate of the revenue relating to award credits, and may also require the use of valuation specialists.

Determination of the fair value of the award credits will generally involve two steps:

1) Estimating the value of each award credit assuming 100% of the award credits will be redeemed; and2) Estimating the expected award credit redemption rates.

5.2.1 Estimating the value of each credit assuming 100% redemption

This typically involves considering:

• The range of goods or services available to the customers.

• The prices at which the entity sells the goods or services for which customers can exchange their award credits. In some cases, sales prices can be determined directly from a price list. However, in the case of services such as air travel and hotel accommodation, prices may vary from day-to-day, depending on the available capacity that the entity wishes to fill. Operators of programmes that offer such services are often able to restrict the opportunities for customers to exchange their awards to situations in which the services would otherwise be sold at relatively low prices. In these circumstances, the fair value of the award credits would be based on those low prices.

• The discounts typically available to all customers for these goods or services. The nominal value of the award granted would be reduced to take into account any discount that would normally be offered to customers in regular sales transactions. In some industries, eg, when a telecommunications company offers discounts to new


and existing customers, this may mean that the fair value of award credits is negligible or even nil.

• Where customers have a choice of different awards, the frequency with which each type of good or service is redeemed. The fair value of the range of available awards will be estimated by weighting the available awards in proportion to the frequency with which each award is expected to be selected.

Example 6 A grocery retailer operates a customer loyalty programme in which customers collect award credits when they buy groceries, and may later redeem these for groceries. Each credit entitles the customer to CU1.50 discount on goods, based on the list price. However, due to the discounts offered by the retailer to all customers, the fair value of each credit is CU1.25, assuming 100% redemption.

Example 7 illustrates some of the factors to consider in programmes that are more complex.

Example 7A retailer operates a customer loyalty programme in which customers earn points when they make purchases. Customers can choose to redeem their points in the following ways:

1. Obtain free products from the stores, where one point is worth CU0.01; or

2. Obtain free theatre tickets and museum entry, where one point is worth CU0.02.

Customers who choose to obtain free products also have a wide range of products from which to choose as the retailer sells both low-value household items and higher-value electrical goods such as televisions and DVD players.

The retailer has identified the following patterns relating to redemption:• In the past 12 months, 30% of the points redeemed have been for theatre and museum tickets, whereas the other 70% have been redeemed for goods in the store.

• 15% of the points issued are held by a small number of customers, known as heavy users. Some of these customers have not yet redeemed any points, but are expected to redeem them in the future for high value electrical goods. Therefore, the historic pattern of award selection is not reflective of the likely future choice of customers.

• 40% of the points issued were to customers who accumulate points and use them within a short time frame, maintaining an average points balance of 500. For this group, the past history is likely to be predictive of the future product choices. Based on these patterns and their future plans, the retailer applies statistical models to weight the fair value of the range of available awards in proportion to the frequency with which each award is expected to be selected. The retailer has estimated that the value of each point, based on 100% redemption, is CU0.012.

5.2.2 Determining the expected redemption rateWhen the fair value of award credits is estimated by reference to the fair value of the award for which they could be redeemed, the fair value of the awards must take into account the proportion of award credits that are not expected to be redeemed by customers.


Example 8 (elaboration of Example 6)A grocery retailer issues 1,000 award credits and estimates that these award credits can be redeemed for goods and services with a fair value of CU1.25.

Management estimates that 20% of the points will never be redeemed.

Therefore, the retailer defers revenue of CU1,000 or CU1 per award credit.

The estimation of the redemption rate is often the most challenging aspect of measuring the fair value of award credits, as it will frequently require the use of sophisticated statistical modelling techniques to analyse historical information. Typically, the models will take into account historical behaviour such as the number of credits accumulated and the frequency and size of redemptions and customer characteristics, such as geographic location and length of time in the programme. It is necessary to consider carefully whether historical redemption behaviour is indicative of expected future behaviour by reference to such factors as changes in the terms of the programme or the customer population or goods or services offered.

In particular, the following factors may impact the estimated redemption rate:

• Changes in the popularity of the programme over the years, with many new members joining, such that the redemption history relating to older years cannot be used.

• Customers who have rarely or never redeemed award credits, building up their balance for redemption for a highly valuable award in the future.

• Changing patterns in the redemption rates relating to such factors as the age of customers, their geographical location, their past buying pattern, the length of time as a customer, etc, that may indicate the population should be segmented into different groups for the purpose of estimating future redemption rates.

• Requirements for customers to build up a minimum level of credits before they can be used, which may mean a number of customers will not be able to redeem their credits. As the consideration allocated to the award credits and the amount of revenue recognised each period are affected by the expected redemption rate, the separation of award credits into groups of customers with relatively homogeneous redemption behaviour is likely to be required by many entities in order to measure reliably the amount allocated to the award credits.

The assumptions and models used to estimate the redemption rates must be reasonable, reliable and objectively determined. The following considerations are relevant in this regard:

• Does sufficient information on which to base assumptions currently exist? It may be appropriate to review existing information systems to ensure that the relevant information regarding redemption activity is being captured.

• Is historical experience predictive of future redemption rates? Changes in marketing or redemption policies, the mix of goods or services offered, competitor actions and changing behaviour patterns may mean that redemption rates based on historical experience need to be adjusted.


• Over time, a comparison of actual redemption rates with estimates made for the period will be required to assess the reliability and accuracy of the models applied and to identify any changing trends that may not have been taken into account.

Once a redemption rate has been determined, it is applied in reducing the fair valueof the award credits issued in order to arrive at the amount of the considerationallocated to the award credits.

The extent of information required to determine the value of award credits issued and the redemption rate depends on the specific facts and circumstances of each programme. Programmes that are simple and less significant to the entity may require less detailed information in order to determine the consideration allocated to award credits and the amount of revenue recognised each period.

Example 9 (continuation of Example 7)The retailer considers the following factors in order to determine the expected redemption rate:

• The average redemption over the life of the programme to date is 70%.

• The programme has become more popular in the past 12 months due to a broader range of goods being made available and increased marketing of the programme. 73% of the points issued in the last 12 months have been redeemed.

• Of the points issued to heavy users, the retailer expects 94% to be redeemed at some stage in the future.

• 4% of the points held relate to accounts that have had no activity for the last three years.

Taking the above into account, the retailer expects the redemption rate to be 79%.

The consideration allocated to each point issued in the period (and, therefore, the amount of revenue per point issued that is deferred) is:

CU0.012 x 79% = CU0.01


6 - Onerous contractsThe basis of IFRIC 13 is that when award credits are issued in connection with a sales transaction, part of the consideration received in respect of the transaction should be allocated to the award credits and recognised as a liability until the entity fulfils its obligations to deliver goods or services when customers redeem the award credits. IFRIC 13 requires the consideration allocated to award credits to be measured by reference to this fair value. However, subsequent changes in facts or assumptions relating to the loyalty programme could result in an increase in the unavoidable costs of meeting the obligations to supply the awards, such that those costs are expected to exceed the consideration received and receivable for the award credits. When this is the case, an entity has an onerous contract and a liability should be recognised for the excess in accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets.

For the purpose of assessing whether a contract has become onerous, an entity needs to consider the effect of changes in the underlying assumptions about the programme that were used to determine the amount of revenue to be deferred, such as:

• Increases in the cost of acquiring the goods or providing the services. In particular increases in the costs of higher value items when a range of goods or services is offered under the programme.

• Changes in the pattern of redemption of award credits, with an increase in the redemption rate of more costly goods or services.

• Increases in the overall expected redemption rate of award credits, such that the overall cost of fulfilling the obligations increases.

7 - Business combinationsIFRS 3 Business Combinations requires an acquirer to recognise the acquiree’s identifiable assets, liabilities and contingent liabilities at their fair value at the acquisition date.

When an entity acquires a business that has a customer loyalty programme, two specific issues arise in relation to accounting for the programme:

• How is the liability in respect of the acquirer’s obligation to supply awards measured by the acquirer?

• Should an intangible asset for the customer loyalty programme be recognised?

7.1 Measurement of the deferred revenue liabilityIFRS 3 requires the acquiree’s identifiable liabilities to be recognised by the acquirer and measured at fair value at the acquisition date. This is the amount for which the liability can be settled between knowledgeable, willing parties in an arm’s length transaction. When the acquiree operates a customer loyalty programme and has accounted for award credits in accordance with IFRIC 13, the fair value of the acquiree’s liability to supply the awards to its award credit holders will in many cases be different from the balance included in the acquiree’s balance sheet.


Firstly, the fair value of the acquiree’s obligations to supply awards is likely to have changed since the acquiree issued the award credits and allocated consideration to them. Secondly, since a change in the expected redemption rate is accounted for as a change in estimate in the period of change and future periods, if the expected redemption rate has previously changed, the carrying amount of the liability will no longer correspond to the fair value of the unredeemed award credits.

Many of the factors noted in Section 5 above will be relevant to determining the fair value, at the date of acquisition, of the obligation of the entity being acquired.

7.2 Intangible assetsIn assessing the identifiable assets of the acquiree, the acquirer also needs to consider whether there is an intangible asset that should be recognised in relation to the customer loyalty programme. Any intangible asset is likely to take the form of a non-contractual customer relationship as customers are not obligated to make further purchases, but may be incentivised to do so due to the loyalty programme. Non-contractual customer relationship assets should be recognised where they meet the ‘separable’ criterion in IAS 38 Intangible Assets and the fair value can be measured reliably.

Where the acquirer can identify a customer relationship asset, this must be measured at fair value, which is likely to require assistance from valuation specialists.

8 - Deferred taxRevenue that is deferred under the requirements of IFRIC 13 may give rise to a deductible temporary difference under IAS 12 Income Taxes, as might provisions for onerous contracts. Such deductible temporary differences will be recognised if it is probable that taxable profit will be available against which the deductible temporary difference can be utilised.

9 - DisclosuresIFRIC 13 does not set out any disclosure requirements. However, IAS 1 Presentation of Financial Statements requires entities to disclose the significant accounting policies that are used in the financial statements. Therefore, when customer loyalty programmes give rise to material amounts in the financial statements, the accounting policy for customer loyalty programmes should be disclosed.


Example 10 Extract from summary of significant accounting policies

Revenue recognition – A1 loyalty programme – accounting policy

The Group operates the A1 loyalty programme which allows customers to accumulate points when they purchase products in the Group’s stores. The points can then be redeemed for free groceries, subject to a minimum number of points being obtained.

The consideration received is allocated between the products sold and the points issued, with the consideration allocated to the points being equal to their fair value. Fair value is determined by applying statistical techniques.

The fair value of the points issued is deferred and recognised as revenue when the points are redeemed.

Where entities have loyalty programmes that are significant, it may also be appropriate for the entity to disclose further details of the programme and key sources of estimation uncertainty, in accordance with IAS 1 Presentation of Financial Statements. This may include such details as the number of outstanding award credits, the period over which the revenue is expected to be recognised, the key assumptions used to determine the period over which this revenue is recognised, and the effect of any change in redemption rates.

10 - TransitionIFRIC 13 does not set out any transition requirements. As such, the requirements of IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors are applicable. However, whether or not this is a change in policy or a change in estimate will require careful analysis of what is actually needed to be changed in the accounting methodology. When an entity has previously recognised its obligations in respect of award credits as an expense at the time of sale, the requirement to account for the obligations as an element of the sales transaction will clearly be a change in accounting policy.

However, when an entity has previously accounted for the programme as an element of a sales transaction, but needs to change its valuation methodology in the light of the requirements of IFRIC 13, this is likely to be a change in estimate.

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