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ARJ 23,2

IFRIC 13: accounting for “customer loyalty programmes”
Sandra Chapple, Lee Moerman and Kathy Rudkin
School of Accounting and Finance, University of Wollongong, Wollongong, Australia
Purpose – The purpose of this paper is to present the views and challenges from a range of accounting professionals, regulators and preparers with the introduction of a standardised approach to accounting for customer loyalty programmes (CLPs). It aims to highlight the ambiguities of the classification of commercial transactions, particularly the nature and timing of revenue recognition. Design/methodology/approach – Comment letters in response to the exposure draft D20 CLPs are analysed together with an exposition of the effect of International Financial Reporting Interpretations Committee (IFRIC) 13 on an early adopter, Qantas airlines. Findings – Despite limited support for the consensus view advocated in D20, the International Accounting Standards Board (IASB) has upheld the deferred revenue approach consistent with the anticipated outcome of the IASB and Financial Accounting Standards Board revenue recognition project. Research limitations/implications – The paper analyses the characteristics and views of lobbyists using the IFRIC process. The use of other discourse methodologies may present issues of power within this process. Practical implications – The paper highlights how the implementation of IFRIC interpretations has the potential to alter reported financial results. Originality/value – The paper highlights the lobbying process and interpretation process at an international level. It also illustrates how companies can engage accounting interpretations to manage earnings, particularly in times of economic challenges. Keywords Customer loyalty, Accountancy, Lobbying, Australia, Airlines Paper type Research paper


Accounting Research Journal Vol. 23 No. 2, 2010 pp. 124-145 q Emerald Group Publishing Limited 1030-9616 DOI 10.1108/10309611011073232

1. Introduction Since 1 July 2008, with early adoption permitted, reporting entities in Australia have been required to apply International Financial Reporting Interpretations Committee (IFRIC) 13 customer loyalty programmes (CLPs)[1] (IFRIC, 2007) in an attempt to standardise alleged widespread and divergent accounting practices for CLPs (IFRIC, D20 BC2). IFRIC 13 is an example of the move to fair value accounting for revenue recognition, whereby the CLP component of a sale transaction is deferred. CLPs are generally established by entities to encourage customers to buy their goods and services. Customers may accumulate points or awards and redeem them in the future, often from a range of options offered by the entity or a third party. Alternatively, points or awards may be linked to certain custom over time, or offered as a welcome customer incentive. The implications for the timing and amount of revenue recognition following adoption of IFRIC 13 has had a significant impact on reported results, particularly in the airline industry (Picker et al., 2009). IFRIC 13 only applies to schemes where an entity grants awards to its customers as part of a sales transaction and the awards are subsequently redeemed for free

or discounted goods or services. IFRIC 13 does not apply to other types of schemes where incentives are offered in the absence of a sale, or where award credits are sold separately. IFRIC 13 also includes schemes where a third party is obligated to supply the goods or services. An award related to a CLP must be categorised as either an asset, liability, revenue or expense to enable representation on a firm’s financial statements. This categorisation assigns importance and relevance to some matters and objects, constructing a financial reality (Young, 2003). This construction, however, is controversial as items are “prodded, probed and snipped, and made to fit into these categories”; categories which themselves are “ambiguous and highly adaptable” (Young, 2003, p. 621). The ambiguity of categorising and measuring economic phenomena is highlighted in the case of CLPs. The obligation to supply awards can either be treated using a provisioning approach or a deferred revenue approach. This choice has been interpreted by the IFRIC as a revenue recognition issue but it could equally be interpreted as a cost/provision issue within the requirements of International Accounting Standard (IAS) 37: Provisions, Contingent Liabilities and Assets. IFRIC 13 provides guidance on the recognition of revenue consistent with IAS 18: Revenue, “in a way that reflects our view that loyalty awards are separate goods or services for which customers are implicitly paying” (International Accounting Standards Board (IASB), 2007b). Thus, entities are required to use the deferred revenue approach, whereby a proportion of sales consideration is allocated to a liability account, and the revenue subsequently recognised when awards are later redeemed by the customer. This treatment is a move towards that anticipated in the revenue recognition project of the IASB and Financial Accounting Standards Board (FASB) (2009). This project, initiated in September 2002, represents a major change in the approach to revenue recognition, from a risk and returns model to that of an asset/liability model. Under this new approach revenue is recognised when an entity’s net position increases, at the time that it transfers goods and/or services to a customer. In the case of CLPs, revenue recognition occurs when the customer redeems the awards. The revenue recognition project also heralds a move towards fair value measurement of revenue and has particular ramifications for those entities currently using the cost/provision method for CLPs where awards are measured at the often insignificant cost of satisfying the obligation. Alternate interpretations have the potential to alter the redistribution of wealth in society, bringing both costs and benefits to diverse stakeholders. Since the timing and amount of revenue recognised in a particular period has economic consequences, the standard-setting process is designed to consider the opinions of various stakeholders (Rappaport, 1977). The IFRIC process of promulgating an interpretation includes invitations to stakeholders to comment on an exposure draft of proposed changes. The ambiguities encountered by practitioners and their advisers in the interpretation of accounting standards, in particular with respect to the commercial practice of CLPs, are explored by reference to the comment letters received in response to the Draft Interpretation D20: Customer Loyalty Programmes (IFRIC, 2006a). The next section provides an overview of the literature on lobbying of accounting standard setters, and the emergent research questions. Section 3 provides background information on the IFRIC with specific reference to IFRIC 13, followed by a discussion of the method used to analyse the comment letters in Section 4. Section 5 provides

Customer loyalty programmes


2007. and apply the concept of phronesis or the analysis of what is rational and practical in a specific context. The analysis of IFRIC 13 and its associated comment letters contributes to the case study literature of accounting standard setting in action (Young. 2007. 2. It is important to undertake specific case study research of accounting change in its context. categorisation of comment letters and their particular perceptions of the issues are important to document the attributes and breadth of those participating in this process. Larson (1997) examined the characteristics of corporations that lobbied the IASC between 1989 and 1994. and that such lobbying pressures can negate efforts to produce standards that are consistent with accounting concepts. Comment letters document the interpretation process and users’ attributes and participation in the standard setting process. There have been numerous calls for such studies. noting that as IFRIC interpretations have the same authority as an International Financial Reporting Standard (IFRS). Young (1994) argues that standard setters must create change to mediate the divergence between the interface of accounting principles and elements and the practice of accounting. increases the explanatory power of an analysis. 120). 1994. Interpretations signal an omission or flaw in the logic and cohesion of existing accounting standards that cannot be mitigated by professional judgement and have the potential to undermine a principles-based approach. 2008). Therefore.2 an analysis of the data. are actively constructed by multiple occupants in a regulatory space. p. This study analyses the technical arguments and the perceived impact on practice as presented in the comment letters by lobbyists of IRFIC 13. they bestow significant power on those who influence IFRIC interpretations. 2004). Standard setting as a process The study of IFRIC 13 is an example of accounting change in action and the process of promulgating an interpretation of existing accounting standards. Bradbury. 126 . Therefore. but rather. proposing that accounting problems are not there waiting to be resolved. with reference to organisational type and geographical area. to make research more relevant (Cooper and Morgan. Qantas. Bradbury (2007) extends this argument. Australia’s international airline. Companies use diverse and non-observable lobbying methods including auditor appeals and private meetings with standard setters. MacArthur (1999) investigated the impact of cultural factors on the submission of comment letters finding that cultural and economic differences between groups constrain harmonisation of accounting standards. Therefore. Masocha and Weetman (2007) claim attention to textual analysis of documents such as published letters of comment. The discussion in Section 6. finding that lobbying of the IASC was done by very large corporations and multinationals. Grinyer and Russell (1992) found that those who write comment letters were seeking to further their economic position. questioning the accessibility of the comment letter process to emerging countries. explores the impact of IFRIC 13 on an early adopter. Responses were overwhelmingly from developed countries. as Bradbury (2007) argues. Young (1994) advocated the importance of studying changes in accounting recognition practises.ARJ 23. comment letters can be regarded as a good proxy for the direct corporate lobbying activity to which the standard setter is subjected (Georgiuo. the interpretation process is significant because it provides a window into the “IASB world” (Bradbury.

The cost/provision approach relies upon an interpretation of IAS 18 paragraph 19. IFRIC 13 is substantively consistent with D20 with some minor concessions in response to concerns raised by commentators to the draft interpretation. are usually applied separately to each transaction. however. the initial transaction is divided into two components. 3. A total of 59 submissions were received by the due date of 6 November 2006 (Appendix 2). discussion and resolution of financial reporting issues (IASCF. 2007)[2]. In doing so. The IFRIC subsequently discussed issues relating to CLPs (see Appendix 1 for a list of meetings) and the Draft Interpretation D20 was released for comment in September 2006. the consensus view. exposing underlying assumptions that contribute to the notion of revenue recognition. This interpretation would apply. Conseil National de la Comptabilite clarification of the accounting treatment for CLPs in 2005. The IFRICs preferred treatment. to warranties provided on the sale of goods.Masocha and Weetman. where a sales transaction involves the issue of an award arising from a CLP. in relation to goods and services. D20 proposed two accounting treatments for CLPs and a hybrid approach reflecting a choice dependent upon the commercial reality of the entities allocating and redeeming award credits. requested The French standard setter. in some cases there is a requirement to recognise the substance of the transaction by identifying the separate components of a single transaction. 2005). This treatment is commonly referred to as the deferred revenue approach (D20 BC5. Each component of the sale is allocated a proportion of the consideration according to their relative fair value. and removal of the reference to intangible assets (Figure 1). Therefore. which states that “revenue and expenses that relate to the same transaction or other event are recognised simultaneously”. It should be noted that IFRIC interpretations do not always proceed to the issuing of a final interpretation. IFRIC 13 was approved by the IASB in June 2007. in the case of CLPs. or Option 2 in Figure 2). Cooper and Morgan. This study identifies the interests and attitudes of the commentators on IFRIC 13 and documents the practical implications for revenue recognition of the proposed interpretation. Customer loyalty programmes 127 . such as the change from measurement of awards at “relative fair value” to “fair value”. for example. 2007. The total consideration for the sale of goods or services is recognised as revenue at the time of sale with a corresponding provision raised for the estimated future costs of supplying the awards in accordance with IAS 37. ´ (CNC). The amount allocated to the award component is deferred and recognised as revenue when the awards are subsequently redeemed. 2007). relies upon an interpretation of IAS 18 paragraph 13. 2008). Background and IFRIC 13: CLPs The trustees of the International Accounting Standards Committee Foundation (IASCF) established the IFRIC in March 2002 to act in conjunction with the IASB to improve financial reporting through timely identification. However. Despite the joint FASB and IASB engagement in a project on revenue recognition staff from the CNC were invited to prepare an issues paper for the IFRIC to provide timely guidance on divergent accounting practice (IFRIC. The IFRIC reviews newly identified reporting issues in existing IFRS in order to reach a consensus on appropriate treatments that are said to be consistent with IFRS and the framework (IASCF. which states that the recognition criteria for revenue. it provides an example of users’ participation in a standard setting process.

Discussion of draft interpretation. Approval of final interpretation by IASB – IFRIC 13. timing of revenue recognition. third-party awards IFRIC meeting. Agreed that draft interpretation be released for comment IFRIC meeting. Request for staff to prepare draft interpretation Comment letters Due 6/11/06 IFRIC meeting.2 128 Figure 1. Staff to prepare final interpretation Mar 06 May 06 Jul 06 Sep 06 Nov 06 Jan 07 Mar 07 May 07 Jun 07 IFRIC meeting. Staff requested to prepare analysis of issues . Consideration of revised draft. Consideration of: allocation based on relative FV. Consideration of third-party awards and forfeiture. Reconsideration of allocation based on ‘relative fair value’. Comment letters considered. Effective for annual reporting periods commencing 1 July 2008 D20 Approach retained in IFRIC 13 with the following amendments: Allocation of consideration to award credits with reference to fair value (not relative FV) Treatment regarding awards supplied by third parties clarified Comment regarding customer relationship intangible assets removed Guidance to measure Fair Value of award credits Illustrative examples include IFRIC meeting. Consensus on IAS18 para 13 – awards as separate component of sales transaction Draft interpretation released – D20 IFRIC meeting.ARJ 23. Issues paper presented by CNC and discussed by members Nov 05 Jan 06 IFRIC meeting. Members agreed on: need for interpretation overall approach proposed scope IASB meeting. Continuation of discussion. Timeline of IFRIC/IASB meetings and other key events IFRIC meeting. Staff issues paper discussed.

which are separately identifiable components of initial transaction (sale). 2007b). Measured at fair value Uses IAS18. Award recognised as an expense and measured in accordance with IAS37. The deferred revenue approach measures the liability arising from future redemption at fair value or selling price.] can be a very time-consuming exercise” (Ernst & Young. D20 options This interpretation forms the basis of Option 1 (D20 BC4) and treats CLP awards as akin to marketing expenses. Based on assumption that CLPs are marketing tools Uses IAS18. the relevant 2006 and 2007 IFRIC and IASB meeting updates and observer notes (Appendix 1). and the text of D20 and IFRIC 13.D20 options Recognition and measurement of obligations to supply goods and services to customers if they redeem “award” points Customer loyalty programmes 129 Option 1 (D20 BC4) Cost/provision approach. while the cost/provision approach measures the liability based on the expected cost of supplying the award (IASB. . 2007). This choice is dependent on the nature of the CLP. Awards granted as an element of market exchange. that is. at cost of satisfying obligation. . For reporting entities the “interpretation may result in a significant change in the point in time at which revenue is recognised” and for “large and complex programmes. Method This study uses the data contained in the following sources: the 56 comment letters available in response to D20 (out of a total of 59 comment letters. three were not available on the IASB web site). paragraphs 16 and 19 as guidance for interpretation Option 2 (D20 BC5) Deferred revenue (liability) approach. the value of the award credit and the entity providing the reward. initial application [. . paragraph 13 as guidance for interpretation Insignificant value and/or goods or service provided by third party Option 3 (D20 BC6) Mixed approach Accounting treatment depends on the nature of CLP – either relative value or the nature or method of supplying rewards Significant value and/or goods or service provided by entity Figure 2. Option 3 (D20. BC6) offers a choice of treatment between the deferred revenue and cost/provision approach. 4.

technical advice groups and emerging issues task forces. Australia. stock exchange regulators. then this was classified as support for the mixed approach. professional accounting bodies. actuaries and other business. if commentators gave approval for the consensus but further argued that this situation only applied to certain types or the nature of the CLP. the Chartered Institute of Management Accountants based in the UK. Table I provides an analysis of comment letters according to preferred option. Only three comment letters were omitted: one was contradictory in the response. if arguments were around materiality. the researchers acknowledge. national standard setters. professional accounting firms. Data analysis Table II categorises the comment letters by organisational type and by geographic region. Where exclusive or explicit support for an option was absent the researchers made a decision based on the narrative. the unit of analysis in this study was the entire comment letter. e. sentence or paragraph level.ARJ 23. e. and summarised on an excel spreadsheet. as shown in Table III. . other business.g. Table II presents the number of commentators that responded to D20 by organisational type and geographical region. namely whether award credits issued pursuant to a CLP constituted a separate component of the initial sales transaction. Additional issues raised in the comment letters were identified and analysed. when revenue should be recognised. how much of the consideration should be allocated to the award and secondly.g. This was done manually. Russia. These were further categorised by geographical representation: Asia. A list of submissions is listed in Appendix 1. and. North America. The professional accounting firms in most instances are global firms but were classified according to the source of the comment letter. National standard setters include urgent issues groups. the texts of the IFRIC meeting papers. Further. Scandinavia and South Africa. Each submission was allocated to a predefined organisational type. each comment letter may have represented the views of several constituents. was classified with European organisations. banks. D20 and IFRIC 13 were reviewed to identify arguments developed and used to substantiate or reject available options. airlines. Coding identified support for the key proposals of D20. 5. The commentators were weighted evenly and each submission counted as a single response. If the submission supported the consensus view. then it was assumed that the commentator accepted the consensus since immaterial CLPs are not subject to the interpretation. first. Europe. IOSCO was explicitly non-committal as they represented a large diverse constituency. Where commentators articulated an explicit preference for one of the three options (Figure 2) it was noted. two further issues were identified. While content analysis can focus on the different units of discourse. e.g. as in the case of International Organization of Securities and Exchange Commissions (IOSCO) as a peak representative body. However.2 130 The 56 comment letters were read by two researchers independently. Two of the professional accounting bodies were also national standard setters (South African Institute of Chartered Accountants and Hong Kong Certified Practicing Accountants) and one. goods supplied in the normal course of business. another did not give a preference. On the other hand.

and one’s knowledge of the process and justification of the proposed standard. 2002. 2007). The four supporting banks were all European. contributed 19 comment letters or 34 per cent of the total. and they provided five arguments to support their preferred option (BC4): the commercial reality of CLP is that of incentive (CL23. Analysis of comment letters: preferred options 5. the percentage of comment letters submitted by accounting interests increased to 63 per cent of the total. with the technical and financial resources available for this type of endeavour. namely KPMG. comment letters from other constituent groups were less forthcoming given the potential economic consequences of alternative accounting treatments on financial statements.Option 1 cost/ provision Accounting profession Professional bodies Public accounting firms Regulators National accounting standard setters Stock exchange regulators Preparers Banks Airlines Other business/business representative groups Actuaries Users None Others Academics Total 4 0 5 0 4 3 1 0 Option 2 deferred revenue 5 3 4 0 1 0 2 0 Option 3 mixed approach 4 3 6 1 0 0 6 0 Option not specified/ ambiguous Total 0 0 1 1 0 0 0 1 13 6 16 2 5 3 9 1 Customer loyalty programmes 131 0 17 0 15 1 21 0 3 1 56 Table I.1 Organisational type Those organisations representing the accounting profession. along with the French firm Mazars. Surprisingly. Deloitte Touche Tomatsu. It does. Ernst & Young and PriceWaterhouseCoopers all submitted letters. with four supporting the cost/provision approach. CL23. This may be explained by the findings of Durocher et al. All of these firms have representatives on the IFRIC. CL37). (2007) that suggest participation in a standard setting process is influenced by the perception of one’s ability to participate adequately. This reflects a high concentration of responses from the accounting profession. however. challenge to some extent the legitimacy of the IASB and the IFRIC. the option is easier to apply in practice (CL2. the treatment is consistent with practice . The “Big 4” accounting firms. namely the professional bodies and public accounting firms. CL37). consistent with previous practice noted by Larson (2007). When combined with the national standard setters. This result may be compared with that of Larson (2007) in which 47 per cent of the all comment letters to IFRIC draft interpretations 1-18 came from a similar group of constituents. CL32. by failing to engage a broad range of stakeholders in the standard setting process (Larson. There were only five responses from banks or banking representative groups.

2 132 Category 2 0 4 6 1 0 0 0 0 0 7 2 0 1 3 0 0 0 1 0 0 4 6 5 7 18 0 4 1 7 1 0 31 1 1 1 3 1 0 0 0 0 0 4 0 0 1 1 0 0 0 0 0 0 1 1 0 2 3 0 0 1 1 0 0 5 Professional accounting bodies Professional accounting firms National standard setters Sub-total – accounting interests Stock exchange regulators Banks Airlines Other business Actuaries Academics Comment letters available Comment letters not available Total comment letters Notes: Two professional accounting bodies were also national standard setters (i. IOSCO has been included with North American interest Table II.ARJ 23. of submissions 13 6 16 35 2 5 3 9 1 1 56 3 59 . they have been classified as professional bodies in the above. Categorisation of submissions by types and geographical representation Asia Australia Europe North America Russia Scandinavia South Africa 1 0 0 1 0 1 1 0 0 1 4 No. CL12 South African Institute of Chartered Accountants and CL57 Hong Kong Institute of Certified Practicing Accountants).e.

such as costs required by significant system changes (CL32). with an even spread across the three options. This is consistent with the findings of Larson (2007). 5. This group provided limited support for the interpretation as proposed in D20. UNICE (Europe) and the 100 Group of Finance Directors in the UK.outside D20 (CL2. or 55 per cent came from Europe. Viewed in conjunction with European representation on IFRIC during the period of deliberations on CLPs (five out of 12 members were European[3]). where 57 per cent of the comment letters on IFRIC interpretations 1-18 came from European constituents. and included representative groups such as G100 in Australia. It should be noted. Analysis of comment letters: additional identified issues . it is suggested that the European contingent had significant opportunity to voice their opinion on the CLP issue. noting commercial “reality” as a significant barrier to implementation.2 Geographical representation A total of 31 of the comment letters. the value of awards is insignificant in comparison with the sales transaction as a whole (CL23). that the Europeans were not united in their preferences. six out of nine business groupings supported the mixed approach where discretion should be left to the individual preparer. Letters from Asian nations represented just over 12 per cent of the total responses. Nine responses were received from the business sector (excluding airlines and banks). These results indicate the extent to which European countries participate in this aspect of the standard setting process. CL37). exceeding those of all other geographic regions apart from Europe. and the benefits of the advocated treatment would not outweigh costs. In total. Six were from national standard setters and professional bodies. however. reflecting the move towards increased involvement at the international level of standard setting and programmes Assumptions of fair value estimates Scope Accounting profession Professional bodies Public accounting firms Regulators National accounting standard setters Stock exchange regulators Preparers Banks Airlines Other business/ business representative groups Actuaries Others Academics Total 8 6 7 1 0 3 4 4 3 0 1 1 Costs versus benefits 3 0 5 0 2 2 Customer relationships and intangible assets 2 2 4 1 0 1 Treatment of third-party transactions 3 2 4 0 1 1 Customer loyalty programmes 133 3 1 0 29 5 0 0 18 1 0 0 13 0 0 0 10 2 0 1 14 Table III.

In some cases. 2007). support was tempered by acknowledgement of the practical difficulties anticipated with implementation. . This is not unexpected given earlier evidence of a poor response rate to previous draft interpretations (Larson. 2007a. Commentators questioned whether the anticipated implementation costs of the deferred revenue approach would be offset by benefits. the IFRIC states that: Incentives to customers can be distinguished in substance from marketing expenses. 18). contributed only four comment letters. IFRIC 13 may be premature or redundant. not value (IASB. Some commentators also suggested that where awards are insignificant in value and incidental to the sale of goods or services. However. p. 2002. the North Americans supported the deferred revenue approach.2 for convergence/adoption by all of these countries over the 2011-2012 period (Deloitte. The North American contingent. Several commentators suggested that if awards are supplied by the entity as part of its normal activities. determining fair value (CL21 and CL38) and separating the components of the initial sale (CL46). Several commentators[4] noted that in the context of the current joint project between the IASB and the FASB on revenue recognition. 5. Marketing expenses are incurred independently of a sales transaction. 2009). 2007a. such as greater relevance of information. this argument is superfluous as immaterial awards are not subject to the scope of the interpretation in accordance with the materiality guidelines in IAS 8 Accounting Policies. when made “prior to the development of a comprehensive framework for multiple component sales”. could have “far reaching effects for other component sales”. the deferred revenue approach (D20 Consensus). particularly regarding timing of revenue recognition (see CL6 in Appendix 1). commentators argued that they should be treated as a marketing expense. including IOSCO. It allows for a choice between the deferred revenue approach and the cost/provision approach. However.ARJ 23. the nature of the transaction affects substance. The European Telecommunications Companies (CL10) suggested that such an interpretation. 19) and that while awards are typically of low value. especially when the cost/provision approach is already widely used in practice. given the long-term timeframe of the revenue recognition project. In defending its choice. 15 of the 56 commentators preferred Option 2. If awards are supplied by a third party. While IOSCO declined to commit to one alternative. 2 or 3? Seventeen of the D20 commentators favoured Option 1 (the cost/provision approach). they are elements of the market exchange between the entity and its customers (IASB. with the common view that the nature of the awards are akin to marketing expenses. or are not part of the entity’s normal business activities. they should be treated as a marketing expense or as a deduction from revenue (trade discount or rebate). then the deferred revenue approach is appropriate. 134 The IFRIC also notes that “the goods or services for which the loyalty points can be redeemed are inherently completely independent of the goods and services delivered in the initial sale” (IASB. Option 3 (the mixed approach) attracted support from 21 of the D20 commentators. p.3 Accounting treatment – option 1. 2007a). Changes in Accounting Estimates and Errors. Incentives to customers are part of the sales transaction itself – whether they reduce the consideration receivable or increase the goods and services deliverable. to secure that transaction. In total.

The scope of IFRIC 13 was limited to include only awards granted as part of a sales transaction (paragraph 3 (a)). Customer loyalty programmes 135 Implementing the guidance. Table III summarises additional issues identified in the comment interim solution may “improve the way that IFRS are implemented in the short term” (European Financial Reporting Advisory Group. In response. the goods and services sold and the award credits granted (D20. The IFRIC notes that: [. “the amount of revenue recognised shall be based on the number of award credits that have been redeemed in exchange for awards. UBS (CL32) discussed schemes offered by financial institutions where customers are given awards. . Nine commentators requested that schemes which offered awards by way of goods or services not supplied in the ordinary course of business (for example. Numerous commentators also sought clarification on the scope of D20 and raised concerns about the costs versus benefits of implementing the preferred approach. Commentators also drew attention to schemes where awards could be redeemed to repay outstanding loan balances or redeemed for cash.] it could be argued that the awards may not be the main activity of the entity. Deloitte (CL31) noted that IAS 18 Revenue. such as reductions in interest charges on loans. According to the final IFRIC Interpretation. paragraph 9 states that revenue should be measured at fair value.5 Scope Commentators sought clarification on the types of schemes covered by the IFRIC Interpretation. In instances where the fair value of award credits are not directly observable. For example. Recognition of deferred revenue occurs when award credits are redeemed (D20. especially regarding forfeitures and the time value of money. but they are supplied on a recurring basis in the course of its ordinary activities. with the subsequent choice of variables left to professional judgement (IASB. paragraph 7). was problematic for many of the commentators[5]. as an (albeit small) component of its sales to customers (IASB. CL55. 5. i. The predominant concern for all groups were the assumptions associated with fair value estimation. The appendix to IFRIC 13 provides application guidance in estimating the fair value of award credits. .4 Assumptions of fair value estimates and timing of revenue recognition The fair value of the consideration received or receivable in respect of the initial sale shall be allocated between the award components. not relative fair value. the IFRIC modified the final interpretation to fair value. 2007a. p. 5.e. Ernst & Young (CL38) suggested that the choice of method should be left to the discretion of entities. Commentators sought clarification on how to recognise revenue of forfeited awards and changes in expected forfeiture rates. paragraph 5). Commentators indicated that the IFRIC was too prescriptive in proposing the use of relative fair value as a means of allocation. IFRIC 13 BC12 indicated there should be an application of an alternative allocation method. which are classified according to type of organisation. 4). 2007b). an airline supplying electrical appliances) be scoped out of the Interpretation. The final interpretation specifically brought credit card providers within this scope (BC4). 21). relative to the total number expected to be redeemed” (IFRIC 13. p. . paragraph 8).

1). 2008).2 Thus. but [. BC11). with only limited benefits for users. . The National Accounting Standards Board of Russia argued that in assessing an entity’s liabilities. p.6 Costs versus benefits The cost of implementation versus the benefits of relevant and reliable information was an issue for commentators. 27). The general public perceives frequent flyer schemes as marketing incentives which are “multibillion dollar assets” for airline companies (Sheehan. 5. the Danish Accounting Standards Committee (CL46) suggested that the D20 approach would lead to significant costs for preparers. . . CL55). if the award is granted as part of the initial sales transaction. p. 5. Another unresolved issue raised by D20 commentators is the difficulty in recognising revenue recognition when a CLP has multiple participants. attracting 13 responses (Table III). CL14. acknowledging that IAS 38 was “peripheral to the issue” and it was “very unlikely” that an intangible asset would arise (IFRIC 13. regardless of the nature of the goods and services provided in satisfaction of the award. BC22(c)). The IFRIC acknowledges that: [. especially for standard setters and professional accounting bodies.] most of the variables that have to be estimated to measure the amount of revenue to allocate to award credits. 2007. users are interested in the resources available to settle future obligations (CL58). CL42. In addition. Finnair (CL20) noted that frequent flyer points are primarily granted on distance travelled. and other commentators made several references to the airline industry (CL12. no direct relationship exists between the revenue and the award. 2007. the IFRIC acknowledged the potential for asset recognition in the case of CLPs. Only one (CL19) submission concurred that an intangible asset could arise if the specific benefits of a particular customer campaign could be separately identified.8 Airlines CLPs gained prominence through the airline industry. 136 In its discussion of cost-benefit issues. and customers have multiple options for award redemption. Within the final IFRIC 13 Interpretation. CL35). The IFRIC deleted this section in the final interpretation. the IFRIC concedes that IFRIC 13 “proposes relatively complex accounting treatments for transactions that are often immaterial” (IFRIC. CL34.ARJ 23.] there might be system costs.also have to be estimated to measure the future cost of fulfilling the obligation (IFRIC. Each airline presented different arguments for retaining their current accounting practice of accruing costs. Similarly. not on value of the sales transaction. CL22. where different carriers are responsible for different legs of travel. cost/benefit issues were relegated to the basis of conclusions (BC10. . CL16. Three comment letters came from airlines (CL20. . . All three commenting airlines supported the cost/provision approach[7]. . then it will fall within the scope of IFRIC 13.7 Other issues While the focus of D20 is on revenue recognition. Revenue is thus recognised when the third party is obliged to supply the awards and entitled to receive the consideration. 5. IFRIC 13 paragraph 8 addresses the supply of awards by third parties and stresses that the accounting recognition of revenue depends on whether the entity is collecting consideration for the awards on its own account or as an agent for the third party[6].

an entity must account for its award credits as deferred revenue measured at the fair value of the subsequent reward. 1995) acknowledges the cost/provision and the deferred revenue approaches. These impacts are the direct effect of adoption of IFRIC 13 as revealed in Note 8: Change in Accounting Policy: . The Airline Accounting Guideline issued by the International Air Transport Association (IATA) in conjunction with KPMG (IATA. but favours the former. 2007). Factors such as route. particularly the ambiguities of implementing IAS 18 with respect to CLPs. “it is recognised that airlines [. .4)[8]. The airline sector offered limited support for the adoption of IFRIC 13. The process of interpretation supports Young’s (2003. the seats typically offered under these programmes are usually excess and of minimal cost to the airline. the categories are stretched and perhaps twisted and are themselves altered – subtly at times and not so subtly at other times.5). and new things are disclosed. This approach required a decision by the IFRIC on whether to classify CLP awards as an expense. 1995. time of flight. 6. The ensuing classification has economic consequences in terms of revenue recognition and the subsequent timing of reported income. time of reservation and various promotional activities of the airlines also impact on the fair value of the award. as demonstrated by the early adoption of the IFRIC 13 and subsequent effects of deferred revenue on the reported results of Qantas.1). and profit after tax declined by 14 per cent. p. paragraph 1. net assets declined by 8 per cent. asset or liability. Qantas as an early adopter of IFRIC 13 experienced a material impact on its reported financial results. At the time of redemption this revenue is recognised. Similarly. 1995. Since 1 July 2008. Further. paragraph 5. whilst not displacing fare paying passengers” (IATA. The interpretation process highlights the challenges of classification faced by standard setters in their attempts to codify commercial practices. .4). The guideline states that “Frequent Flyer Programmes (FFPs) have now been introduced by many international airlines. discussed below. For the half-year ending December 2007. As these things are fitted into the old categories. As highlighted by British Airways (CL35). 1995. paragraph 1. airlines have used the incremental cost (cost/provision) approach (IATA. net assets were reduced by 9 per cent and profit after tax fell by 7 per cent (Qantas. noting “commercial reality” as a significant barrier to implementation. 1995. Customer loyalty programmes 137 Despite compelling arguments presented by commentators. Discussion The opportunity for submission of comment letters in response to D20 is an example of the international standard-setting forum for voicing stakeholders’ interests.] are committing themselves to future liabilities arising from servicing the FFP” (IATA. in the half-year period ending December 2007. and that historically. paragraph 1. principally to induce higher levels of repeat business” (IATA. the IFRIC maintained its initial stance of treating CLPs as a revenue recognition issue. It adds that “the extent of marketing benefits [by the airline] is partly dependent on its ability to handle extra traffic generated by the FFP [frequent flyer program]. new items are called expense and revenue or asset or liability. 621) assertion: With each issuance of a new standard. new things are measured. revenue.South African Airways (CL22) suggested that awards are granted to customers as marketing expenses to encourage ongoing sales.

whilst the value attributed to the awarded points is deferred as a liability until the points are ultimately realised (Qantas Airways Limited. A 20. with 38 of the 56 commentators rejecting the IFRIC’s preferred treatment. p. 2009. . 2009b). due in part to rising fuel costs and the recent HINI Influenza 09 virus (Qantas Airways Limited. . While the proposed sale has been postponed. . 2009b) from 2008 for the Frequent Flyer programme (Qantas Airways Limited. p.2 The previous accounting policy created a provision for the cost of the obligation to provide travel rewards [. 138 In 2007. 2007. D20 and IFRIC 13 involve complex arguments for the classification of economic phenomena. The review of the D20 interpretation process highlights the commitment of the IFRIC to adhere to the asset/liability model of revenue recognition and fair value measurement. The approach advocating an accounting treatment that depended on the commercial reality or nature of the CLP (Option 3) was dismissed by the IFRIC although it was the most popular choice by the commentators. and eliminating the credit card provider as a third party supplier of points (Knight. 5). The impact of this CLP has been significant for Qantas in a period of economic challenges for the airline industry. By the year ending 30 June 2009. Qantas relaunched the Frequent Flyer segment including “Any Seat Awards” to increase redemptions and thus the recognition of deferred revenue. Following changes to revenue recognition on 1 January 2009. p. 2009.8 per cent improvement in revenue was recorded for the half-year ending December 2008 as a result of the new programme. in an “earnings sense the Frequent Flyer tail is wagging the Qantas dog” (Knight. Qantas created a separate operating segment for its frequent flyer programme in anticipation of a sale to external parties. Qantas anticipates “higher earnings for approximately 2 years” (Qantas Airways Limited. The development of IFRIC 13 reveals the ambiguities associated with applying accounting standards to commercial practices. This analysis of IFRIC 13 demonstrates the complexities of revenue recognition and highlights the role of interpretation in determining accounting classifications. 17). Commentators lobbying the IFRIC also highlighted implementation problems of its preferred approach. p. 2009a). the airline has reported segment financial information which reveals a different story to the economic impact to the one described above. The new Qantas Group accounting policy requires [. 8). 7. In July 2008. Conclusion The IFRIC’s classification of award credits as deferred revenue was controversial. The Frequent Flyer segment contributed $310 million to the consolidated profit before income tax and net finance costs of $203 million of Qantas (Qantas Airways Limited.] the value attributable to the flight is then recognised on passenger uplift. Within the context of declining profits in the airline industry. 2009a). foreshadowing the outcome of the IASB and FASB revenue recognition project. . 2009b. 5).] The provision was calculated as the present value of the expected incremental cost (being the cost of meals and passenger expenses) of providing the travel rewards. . a 64 per cent increase (Qantas Airways Limited. Qantas was also accused of “fattening up for sale” the Frequent Flyer programme by increasing membership through partnerships with the supermarket chain Woolworths. benefits arising from changes in accounting estimates ($147 million) and increased redemption revenue ($237 million) contributed to the profit before tax of $384 million.ARJ 23.

pdf (accessed 7 January 2010). 8. “Corporate lobbying on accounting standards: methods. pp. FASB (2009). Ken Wild – UK. revenue arises from providing an agency service to the third party. situations arise where an airline provides not only reward flights. S.ey. 4. September 2007. L. Cooper. The nature of the relationship is determined by the contractual arrangement between the CLP and third-party supplier. Ernst & Young (2007). “Case study research in accounting”. CL12. Deloitte (2009). Accounting Horizons. 219-37. Georgiuo. 3. 2. available at: www. Accounting. M. “Project update: revenue recognition project – a joint project of the FASB and the IASB”. 2007). Organizations and Society. According to IAS 1 Presentation of financial statements. CL41. interpretations issued by IFRIC are considered to have the equivalent authority of both IFRS and the former. CL2. (2009. 159-78. useias. but also award credits on behalf of other airlines (CL22). Qantas and the management of its Frequent Flyer programme to support reported earnings. For example. Claudio De Conto – Italy.fasb. 29-59. CL36. 32 Nos 1/2.The economic consequences of changes to accepted practice as a result of the IFRIC 13 determination is illustrated from the perspective of the early adopter. and Morgan. 5. and Cote. CL12. CL55 and CL56. (2007). “An anatomy of an IFRIC interpretation”. D. If the entity acts on its own behalf. 2. C35. (2008). pp. CL22. Vol. CL22. “Users’ participation in the accounting standard-setting process: a theory-building study”. CL30. If the entity acts as an agent for a third party. Ian D Wright – UK (IASC Foundation Annual Report 2006. CL47 and CL51. Notes 1. IAS. CL25. and is the net amount retained by the entity. Vol. CL3. A. South African Airways acknowledged that there may be situations where the deferred revenue method might be appropriate. 109-22. 22 No. that is. CL10. $FILE/IFRIC%2013%20Customer%20Loyalty%20Programmes. 6. “IAS plus: use of IFRSs by jurisdiction”. G.htm (accessed 4 December 2009). then it accounts for the allocation of revenue from award credits and recognises revenue when it fulfils its obligation.shtml (accessed 4 December 2009). Vol. the consideration allocated to the award credits less the amount payable to the third party (IFRIC 13 BC20).iasplus. CL29. Released in August 2007 as Australian Accounting Standards Board (AASB) Interpretation 13 for adoption by reporting entities from 1 July 2008 under AASB 1048: Interpretation and Application of Standards. 4 Nos 1/ Vol. References Bradbury. Customer loyalty programmes 139 . pp. Accounting in Europe. 134-9). 2. CL11. (2004). Abacus.. Cl4. pp. available at: www. available at: www. CL49. CL51. CL13. (2007). Jean-Louis Lebrun – France. 7. W. pp. European IFRIC members 2006/2007: Jeannot Blanchot – France. Fortin. “Customer loyalty programmes: implementation guidance”. CL34. 40 No. timing and perceived effectiveness”. For an example of changes to airline financial statements see Picker et al.

(1999).K. 1.pdf (accessed 7 January 2010). W. J. Australian Accounting Standards. (2009). and Weetman. pp.iasb. IFRIC (2005). 20 London. “National impediments to international harmonization: evidence of lobbying in the UK”. International Accounting Standards “Corporate lobbying of the International Accounting Standards Committee”. “Consolidated interim financial report for the half year ended 31 December 2007”. p. Auditing & Accountability Journal. E. International Accounting Standards Foundation Committee. 15. “Qantas rewards arm keeps on delivering”. “Constituent participation and the IASB’s International Financial Reporting Interpretations Committee”.ARJ 23.pdf (accessed 7 January 2010). Journal of International Accounting. 315-35. International Accounting Standards Foundation Committee. 4. IFRIC (2006a). available at: www. Leo. Qantas Airways Limited (2007). Loftus. K. 3.pdf (accessed 7 January 2010).org/NR/rdonlyres/ 93B52105-5055-4868-B51D-FACAA0E8B72C/0/IFRICD20. pp. 1 No. Knight.K. 74-100. IFRIC Update. Larson. 2nd ed. “The impact of cultural factors on the lobbying of the International Accounting Standards Committee on E32 comparability of financial statements: an extension of MacArthur to accounting member bodies”. Airline Accounting Guideline No 2.pdf (accessed 7 January 2010). Wiley.2 Grinyer. A. IASB (2007a). V. IFRIC Information for Observers. IASCF (2007). (1992).au/infodetail/about/investors/ 2007HYResults. available at: www. P. Due Process Handbook for the IFRIC. (1997). Journal of International Financial Management and Accounting. 79-120. IFRIC Interpretation 13 Customer Loyalty Programmes. Larson. International Accounting Standards Board. Larson. IFRIC (2007). Vol. J. The Sydney Morning Herald. IATA (1995).iasb. available at: www.. 175-203. R. (2007). Vol. IFRIC (2006b). 5. International Accounting Standards Board.iasb. 20 June. Advances in International Accounting.pdf (accessed 7 January 2010).. Accounting.iasb. London. Picker. 2.. Accounting in Europe. International Accounting Standards Board. R.pdf (accessed 7 January 2010). and Wise. IFRIC Update. 140 IASB (2007b). International Air Transport Association. “Rhetoric in standard setting: the case of the going-concern audit”. London. MacArthur. (2007). 8 No. Vol. pp. Vol. London. Auditing and Taxation. available at: www. K. London. J. pp. London. available at: www. pp. 1. Vol. 207-54. Vol. Journal of International Accounting Auditing and Taxation. 13-31. IFRIC Draft Interpretation D20 Customer Loyalty Programmes. 8 Frequent Flyer Programme. . IFRIC Issues Guidance on Customer Loyalty Programmes. Masocha. R. International Accounting Standards Board. available at: www.pdf (accessed 7 January 2010). (2002)..qantas. Clark. available at: www. Montreal. R. “The IASC’s search for legitimacy: an analysis of the IASC’s Standing Interpretation Committee”. (2009).iasb. and Russell.

89-98. Accounting. Young. 19 No. 1. (2003). persuading and silencing: the rhetoric of accounting standards”.edu. 621-38. (1994). Young. 83-109. (2008).qantas.emeraldinsight. May. Rappaport. “Constructing. January. 11. Customer loyalty programmes 141 To purchase reprints of this article please e-mail: reprints@emeraldinsight. Organizations and Society. P.qantas.pdf (accessed 7 January 2010). J. Organizations and . “Frequent flyer points are a big con”. 28 No. “Outlining regulatory space: agenda issues and the FASB”. The Sydney Morning Herald. Sheehan. pp. Or visit our web site for further details: www. Vol. 14. Vol.Qantas Airways Limited (2009a). Qantas Airways Limited (2009b). pp. “Economic impact of accounting standards – implications for the FASB”. pdf (accessed 7 January 2010). (Appendices follows overleaf. (1977). 6.) Corresponding author Lee Moerman can be contacted at: leem@uow. A. Journal of Accountancy. “Qantas Frequent Flyer: supplementary information”. Accounting. available at: www. available at: “Media release: Qantas announces profit result – year ended 30 June 2009”.

ARJ 23. London. March 2007 (Agenda papers 2-2(v)). IFRIC/ IASB updates and observer notes for meetings Updates on IFRIC meetings given to the IASB: November 2005.iasb. July 2006.htm . London.2 142 Appendix 1.htm IASB meeting summaries and observer notes: customer loyalty programmes: June 2007 (request for Ratification of Interpretation: Agenda papers 7A and 7B). London. March 2007. March 2006 (Agenda paper 8). Published by IASB.iasb. July 2006 (Agenda paper 2/2(i)/2(ii)).org/Currentþ Projects/ IFRICþ Projects/Updatesþ onþ IFRICþ meetingsþ givenþ toþ theþ IASB. May 2006.htm IFRIC meeting summaries and observer notes: customer loyalty programmes: January 2007 (Agenda papers 3/3(i)/ 3(ii)). Published by þ Projects/IFRIC þ Projects/ IFRIC þ 13 þ Customer þ Loyalty þ Programmes/Meeting þ Summaries þ and þ Observer þ Notes/Meeting þ Summaries þ and þ Observer þ Notes. available at: þ Projects/IFRIC þ Projects/ IFRIC þ 13 þ Customer þ Loyalty þ Programmes/Meeting þ Summaries þ and þ Observer þ Notes/Meeting þ Summaries þ and þ Observer þ Notes. January 2006.htm IFRIC information for observers: customer loyalty programmes: January 2006 (Agenda paper 8). Published by IASC Foundation. May 2007 (Agenda paper 2). May 2007. January 20Meetings%20-%20Agenda%20Papers. available at: www. May 2006(Agenda paper 3). March 2006.iasb. available at: www.iasb. Published by IASB. London. available at: www.

Appendix 2 Letter number South Africa UK The Netherlands UK Malaysia Japan Singapore Global – based in UK Global – based in USA Europe UK South Africa Professional body Auditors Telecommunications – award providers Actuaries Professional body/standard setter Standard setter Business Standard setter Professional body National standard setter Standard setter Professional body University Financial institution Standard setter Standard setter Submitter/organisation Country Industry/type of organisation CL1 CL2 CL3 CL4 CL5 CL6 CL7 CL8 CL9 CL10 CL11 CL12 CL13 CL14 CL15 CL16 CL17 Korea Belgium Finland Ireland Elmar Venter (accounting academic) British Bankers Association Dutch Accounting Standards Accounting Standards Board Urgent Issues Task Force Malaysian Accounting Standards Board Japanese Institute of Certified Practising Accountants Council on Corporate Disclosure and Governance Chartered Institute of Management Accountants Grant Thornton International Joint letter from Belgacom. D20 comment letters received . MEDEF AcSB CPA Australia (in consultation with APRAG) FirstRand Switzerland France Canada Australia and regional perspective South Africa Financial institution – operate CLP for customers of bank Standard setter Standard setter Airline Professional body (continued ) CL18 CL19 CL20 CL21 IFRIC Review Committee of Korean Accounting Standards Board Belgian Accounting Standards Board Finnair Institute of Chartered Accountants Customer loyalty programmes 143 Table AI. Clarke and Peacock South African Institute of Chartered Accountants (also Secretariat for Accounting Practices Board) Swiss GAAP FER ACTEO. AFEP. Deutsche Telekom. Telefonica and Vodaphone Lane. debitel AG.

including most of country’s industrial and commercial firms Danish accounting standards committee National accounting standards board (continued ) .2 144 Letter number South Africa Europe USA Sweden Europe Sweden Switzerland Germany UK UK Switzerland UK UK UK France UK UK Australia Switzerland Sweden France Germany Switzerland Denmark Japan Business Professional body Agribusiness Professional body Professional body Airline Banking Professional body Listed companies CL22 CL23 CL24 CL25 CL26 CL27 CL28 CL29 CL30 CL31 CL32 CL33 CL34 CL35 CL36 C37 C38 CL39 CL40 CL41 CL42 CL43 CL44 Not available Foreningen af Statsautoriserede Revisorer Accounting Standards Board of Japan Not available CL45 CL46 CL47 CL48 Table AI.ARJ 23. Submitter/organisation South African Airways European Association of Cooperative Banks Florida Institute of CPA ¨ ringsliv (forum for chief Svenskt Na accountants from largest Swedish listed companies) UNICE FAR SRS Syngenta Institut Der Wirtschaftsorurer Institute of Chartered Accountants in England and Wales ICAEW Deloitte UBS PricewaterhouseCoopers The 100 Group of Finance Directors British Airways CNC HSBC Ernst & Young The Institute of Chartered Accountants Nestle Redovisingsradet Mazars Rechnungslegungs Interpretations Swiss Holdings Country Industry/type of organisation Accounting firm Financial products Accounting firm Top FTSE 100 companies Airline National standard setter Financial institution International accounting firm Professional body Food Emerging issues task force International accounting and audit group Accounting interpretations committee 40 Swiss groups.

Letter number Group of 100 Australia UK UK Europe EU International Hong Kong Russia Thailand Australia Submitter/organisation Country Industry/type of organisation CL49 CL50 CL51 CL52 Chief financial officers of Australia’s largest businesses National standard setter Accounting firm Professional body Association of professional bodies Technical support to European Commission CL53 CL54 CL55 CL56 CL57 CL58 Representative body of regulators Professional body and national standard setter National standard setter Regulator CL59 AASB KPMG The Association of Chartered Certified Accountants Not available ´ de ´ ration des Experts Comptables Fe ´ ens (European Federation of Europe Accountants) European Financial Reporting Advisory Group EFRAG The IOSCO Hong Kong Institute of Certified Public Accountants National Accounting Standards Board of Russia Securities and Exchange Commission Thailand Customer loyalty programmes 145 Table AI. .