Tweet Sales incentives, future product returns and product warranties are classified as current liabilities.
A popular and effective initiative is to introduce a customer loyalty program to reward previous purchases and offer incentives to encourage repeat purchases. These programs also differ, among others, on the manner of redemption e.
Credits can also be earned by buying products or services from another entity who is not necessarily participating in the program, or awards can be redeemed for products or services of the company or of another entity.
A good example is an airline alliance mileage program where loyalty miles can be earned from one airline but may be used to fly another airline within the alliance. As loyalty programs vary, so do their accounting treatment.
In general, there are two main approaches which have evolved in practice -- the marketing expense approach and the deferred revenue approach. Under the marketing expense approach, the cost of supplying goods or services in the future related to the loyalty award credit is recognized as an expense at the time of selling the goods or service initial sale.
Under the deferred revenue approach, the award credit is treated as a separate component of the sales transaction that requires delivery in the future. For annual periods beginning on or after 1 JulyIFRIC 13 requires the use of the deferred revenue approach, which entails apportionment of the consideration received or receivable from customers for the initial sale between the: The amount allocated to the award credit is deferred and recognized as revenue only upon redemption or usage, expiration or, in some cases, when the entity revises its expectations of the number of award credits expected to be redeemed.
IFRIC 13 also requires that the award credit be measured at fair value -- the amount for which the award credit could be sold separately not the cost to the entity when the award is redeemed by the customer.
For companies which have adopted the interpretation, the difficulties they have encountered in transitioning to, and complying with, IFRIC 13 generally revolve around 1 the estimation of the fair value and the redemption rate of the award credits; and, 2 the availability of data.
The challenge here is balancing the level of detail of the data to be tracked in the system to ensure compliance with the interpretation and provide management with information to evaluate the effectiveness of the programagainst the related costs e.
In terms of financial reporting, adopting IFRIC 13 would mean a change in accounting policy for companies previously using the marketing expense approach.
Instead of recognizing marketing expense and the corresponding liability representing the expected cost of settlement of the award when the award credit is earned by customers, revenue is reduced or deferred and a liability is recognized representing the obligation to render services or deliver goods in the future when the award credit is redeemed.
Additionally, the interpretation requires the change in accounting policy to be taken retroactively and reflected in the financial statements since the earliest period presented.
This poses a challenge particularly when information or systems for the comparative prior periods are nonexistent.
On the other hand, companies that have been using the deferred revenue approach but changed the valuation method e. As IFRIC 13 does not prescribe a specific method for estimating the fair value of the award credit, management would have to choose an appropriate method and apply the selected method consistently.
Over the years, the use of customer loyalty programs to boost sales has been employed successfully by various industries airline, telecommunications, hotels, retail and consumer credit are but a few. These programs will continue to evolve as market demands change.
This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant.Loyalty Rewards and Gift Card Programs: Basic Actuarial Estimation Techniques 3. REDEMPTION RATE ESTIMATION APPROACHES One of the key components of nearly every loyalty reward or gift card program is the redemption rate.
The redemption rate is also frequently the single most challenging component to estimate. ACCOUNTING FOR FREQUENT FLIERS. FSA Part 1 a) What are the various methods United might use to measure the costs of its frequent flier program?
What are the potential differences in dollars of the cost measured by each method? Method /5(2). Dec 16, · Accounting for Loyalty Programs Accounting for customer loyalty programme FASB: Discussion on Accounting for "Points"(EITF) Posted by Yogendra at PM.
Cool Cartoons on Frequent Flyer; Web Flyer good help for frequent flyers; Economics of Loyalty; Loyalty Spin-off;. Qantas Frequent Flyer Investor Briefing June 2 QFF is a successful business with significant value Shareholder Value [Under accounting standards existing points at 1 January will continue to recognise revenue at the higher value until all these points are extinguished.
This will result in higher earnings for approximately 2 years. The incentive to redeem frequent flier miles â that free ticket â is not as appealing for travelers as it once was, because of blackout dates, limits on eligible seats, especially for popular destinations, and the lower fares on discount carriers, but not visiting your frequent flier accounts can have a price.
Add a Frequent Flyer 3SSRFQTVAA FFAA Delete a Frequent Flyer [email protected] Removes and sends no message XX Accounting Fields Worldspan Sabre Format Comparison Page 6 of 8 Worldspan Sabre Copy passenger data only ECXI#*A/FP ECPD.