IFRIC 13 Customer Loyalty Programs

IFRS Guide > IFRIC 13

IFRIC 13 Customer Loyalty Programs

The International Financial Reporting Interpretations Committee (IFRIC) issued an Interpretation, IFRIC 13 Customer Loyalty Programs to give guidance for how companies should perform the accounting for granting loyalty award credits. These are commonly known as rewards points or frequent flyer miles, and are granted to customers for buying goods or services. To be precise, it explains how such an entity should record their liabilities to provide discounted or free goods or services, also known as awards, to customers who redeem these loyalty program award credits.

Entities are required to allocate a percentage of the proceeds from the initial sale to the award credits. They will then recognize these proceeds as revenue, but only when they have fulfilled their obligations. This fulfillment of the obligation can be done by one of the following:

1. Supplying awards themselves, or
2. Engaging, and paying, a third party to do so

The interpretation ensures that liabilities to supply customer loyalty awards are consistently measured across companies. This will occur regardless of whether the award credits are sold separately or granted to customers as part of a larger sale. The interpretation sets a standard practice in a way that reflects loyalty awards as separate goods or services for which customers are implicitly paying.

Key points:
o Companies that grant loyalty award points must shall allocate a portion of the proceeds from initial sale to the award credits as a liability. This liability marks the obligation to provide the awards.
o Measurement of the proceeds to be allocated to the award credits must be measured in reference to their fair value. Fair value is decided as the amount the award credits could have been sold for separately.
o The company needs to recognize a deferral for the portion of the proceeds as revenue, however only when it has fulfilled its obligations. This fulfillment is considered to be either by supplying the awards itself or by engaging (and paying) a third party to do so.
o If the expected costs of meeting the liability become higher than the amount received, the company must consider this an onerous contract. IAS 37 requires an onerous contract to be recognized as a liability.

If IFRIC 13 causes an entity to change its accounting policy for customer loyalty awards, IAS 8 applies.

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