It is common practice in certain industries to reward customers for the purchases that they make through, for example, frequent-flyer programmes and supermarket loyalty points.

The application of accounting principles to loyalty schemes has resulted in different treatments arising in practice. IFRIC has recently issued an interpretation dealing with this specific issue.

IFRIC 13 ‘Customer Loyalty Programmes’ requires that where an entity grants loyalty points, it should allocate the proceeds received on the related sale between revenue and the future obligation to provide ‘bonus’ products or services. The liability should be measured at the fair value of the loyalty point credits granted, determined by ascertaining the price that the entity would be able to charge if it were to sell the loyalty point credits separately. Revenue will be initially recognised net of the future liability, which will remain on the balance sheet until it is recognised within revenue.

The remaining revenue will only be recognised once the entity has either fulfilled its obligation to provide the relevant bonus products or services, either by supplying them or paying a third party to provide them on its behalf, or when the points expire. The interpretation contains specific guidance on how fair value should be assessed.

IFRIC 13 will take effect for periods beginning on or after 1 July 2008, although early application will be permitted.

Smith & Williamson Commentary

Customer loyalty schemes have become increasingly common and guidance on achieving a uniform accounting treatment is welcome. A number of respondents to the IASB’s initial proposals did, however, question whether the existence of a customer loyalty scheme should affect the value of turnover, as opposed to being a component of the cost of making the sale.

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