IFRS Compliance for Customer Loyalty

1
IFRS Compliance for Customer Loyalty

• 12 June 2009

Abhishek Patodia, Mumbai Email
abhishek.patodia_at_mercer.com Phone [phone]
4526
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Agenda

• What is Customer Loyalty Programme?
• IFRIC 13
• Result of Analysis
• Case Study
• Implication on Companies
• Q A

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What is a Customer Loyalty Program ?

• A Customer Loyalty program is used to provide
  incentives for customers to purchase goods or
  services
• The program usually specifies a minimum
  requirement to receive the incentive
• e.g. purchase 10 coffees and receive the 11th
  coffee free

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Customer Loyalty Programme in India

• i-mint is India's largest coalition loyalty
  program with multiple partnerships with Indias
  leading brands Airtel (Telecom), HPCL
  (petroleum), ICICI Bank, Indian (Airlines),
  Lifestyle (Retail) and MakeMyTrip.com (Travel).
• Bharat Petroleum (BPCL)'s PetroBonus is one of
  the largest fuel card programs in India. It also
  has variants for fleets and convenience store
  customers.
• Indian Oil Corporation (IOC) has a Fleet Card
  Program Xtrapower and a loyalty program
  Xtrarewards for Retail Customers.
• Shoppers Stop (a major retail brand) has one of
  the countrys oldest and probably most popular
  loyalty programs First Citizen.

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Customer Loyalty Programme in India

• The Taj group of hotels also has a program and a
  co-branded credit card with Citibank Diners
  Club
• All major banks and credit cards offer customer
  loyalty programs. Co-branded credit cards are
  also present, for example Citibank offers credit
  cards which are co-branded with Shoppers Stop /
  IOC /Jet Airways
• All major airlines (such as Jet Airways,
  Kingfisher Airlines, Indian, etc) have frequent
  flyer programs

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International Accounting StandardsIFRIC 13
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International Financial Reporting Interpretation
Committee Interpretation 13 (IFRIC 13)

• Aims to standardise how Customer Loyalty Programs
  recognise, measure and disclose in financial
  statements obligations that arise from providing
  customers with free or discounted goods or
  services.
• Applies to award credits, from a Customer Loyalty
  Program, that are part of a sales transaction and
  require other qualifying conditions.
• Revenue from the sale of award credits is
  deferred until the obligation to provide awards
  is met.

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IFRIC 13

• IFRIC 13 has mandated paragraph 13 of IAS 18
  applies
• ..in certain circumstances, it is necessary to
  apply the recognition criteria to the separately
  identifiable components of a single transaction
  in order to reflect the substance of the
  transaction. For example, when the selling price
  of a product includes an identifiable amount for
  servicing, that amount is deferred and recognised
  as revenue over the period during which the
  service is performed.

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Application

• What is the revenue to be deferred?
• Fair Value of the points issued
• What is Fair Value?
• The price payable if the award credits could be
  sold separately
• Weighted average of the fair value of awards
  allowing for award credits expected not be
  redeemed
• How to Allocate?
• When to recognise liability under IAS 37

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Results of Analysis
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Analysis
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Analysis
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Case Study
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Case StudyAwards supplied by the Entity

• A grocery retailer operates a customer loyalty
  program. It grants program members loyalty points
  when they spend a specified amount on groceries.
  Program members can redeem the points for further
  groceries. The points have no expiry date.
• In one period, the entity grants 100 points.
• Management expects 80 of these points to be
  redeemed.
• Management estimates the fair value of each
  loyalty point to be one currency unit (CU1), and
• defers revenue of CU100.

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Case StudyYear 1

• At the end of the first year, 40 of the points
  have been redeemed in exchange for groceries,
  i.e. half of those expected to be redeemed.
• The entity recognizes revenue of
• (40 points / 80 points)CU100 CU50.

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Case Study Year 2

• In the second year, management revises its
  expectations. It now expects 90 points to be
  redeemed altogether.
• During the second year, 41 points are redeemed,
  bringing the total number redeemed to 4041 81
  points. The cumulative revenue that the entity
  recognises is (81 points / 90 points)CU100
  CU90.
• The entity has recognised revenue of CU50 in the
  first year, so it recognises CU40 in the second
  year.

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Case StudyYear 3

• In the third year, a further nine points are
  redeemed, taking the total number of points
  redeemed to 81 9 90.
• Management continues to expect that only 90
  points will ever be redeemed, i.e. that no more
  points will be redeemed after the third year. So
  the cumulative revenue to date is
• (90 points / 90 points)CU100 CU100.
• The entity has already recognised CU90 of
  revenue (CU50 in the first year and CU40 in the
  second year). So it recognises the remaining CU10
  in the third year.
• All of the revenue initially deferred has now
  been recognised.

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Implication on Companies
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Implications on Companies having Customer Loyalty
Programmes

• Need to estimate
• how long a member holds their points/miles before
  they are redeemed for an award,
• the probability of redemption or expiry for the
  balance (or current outstanding points) at a
  point in time for example the accounting date
• Requirement of Actuaries to do the valuation or
  review the valuation they have performed.
• Audit companies recommend that an actuary should
  calculate the probability of a point expiry.
• Pricing Design

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IFRIC 13 in Asia Pacific

• Australia, New Zealand, Singapore, Hong Kong
• Accounting Years beginning 1 July 2008
• India 1 April 2011
• Japan No later than 1 July 2011
• Korea in draft stage implementation expected 1
  January 2011
• Thailand Currently moving towards IFRS
• Malaysia currently in draft, for period
  beginning 1 Jan 2010
• China possibly 2009, to be confirmed
• Indonesia unclear but moving towards IFRS
• Taiwan unclear but moving towards IFRS
• Philippines unclear but moving towards IFRS

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• Q A

THANK YOU