Chapter 1 – Provisions, Contingencies and Other Liabilities

The statement of financial position at the end of the year reports the following:

Premiums Inventory (or Prepaid Expense) of P144,000 and Estimated Premium Claims
Outstanding of P304,000.

The profit or loss for the year reports Premium Expense of P960,000. If expenses in profit or loss
are classified according to function, Premium Expense is classified as part of selling or marketing
expenses.

Customer Loyalty Awards

Certain companies grant their customers rewards for patronage of their products and services.
Examples of this scheme are awarding of points to SM Advantage cardholders, accumulation of mileage
for Philippine Airline Mabuhay Miles frequent flyers, and other privilege cards which entitle holders to
exchange points accumulated from purchases for goods and services of the entity. Such points, therefore,
are used by customers as part or full payment for goods and services offered by the company.

Awards Supplied by the Entity

Under IFRS 15, Revenue from Contracts with Customers, the revenues from contracts with
customers shall be recognized when (or as) the entity satisfies the performance obligations. The
transaction price on the contract shall be apportioned to the performance obligations when the contract
requires series of performance obligation. The allocation shall be based on relative stand-alone selling
prices of each distinct good or service promised in the contract. Thus, when an entity provides customer
loyalty awards on the principal goods or services sold, the consideration received or receivable by an
entity for goods sold is apportioned between the product or service sold and the customer loyalty awards
redeemable in the future. The fair value of each performance condition on a stand-alone basis shall be
used for the allocation. The redeemable loyalty awards are recognized initially as a liability and
recognized as revenue upon redemption.

To illustrate, assume that SM Corporation grants its customers one reward point for each P200
sales. Each point is redeemable in the form of merchandise and equivalent to P1. The points accumulate
and may be used by the customer as part payment for merchandise purchase in the future. During the
month of April of the current year, total sales of the company amounted to P24,000,000. Fair values of
merchandise and the reward points are P23,880,000 and P120,000, respectively.

Allocation:

P24,000,000 x P23,880,000/P24,0000,000 P23,880,000

P24,000,000 x P120,000/P24,000,0000 120,000
Total P24,000,000

The journal entry at the time of sale is as follows:

Cash 24,000,000
Sales 23,880,000
Liability for Customer Loyalty Awards 120,000

By the end of the first year, 45% of the points have been redeemed, and it is expected that only a
total of 90% of the points granted will be redeemed by the customers. SM recognizes revenue for points
redeemed at P60,000 (which is 45%/90% x P120,000). The entry for the redemption is:

Liability for Customer Loyalty Awards 60,000

Sales 60,000
45%/ 90% x P120,000
Chapter 1 – Provisions, Contingencies and Other Liabilities

If during the second year, the company redeemed an additional 40% and it revised its estimate of
total points expected to be redeemed at 100%, the company would recognize revenue for this redemption
at P42,000, which is computed as follows:

(45% + 40%)/100% x P120,000 P102,000

Less revenue from previous redemption 60,000
Revenue recognized in the second year P 42,000

If in the third year, the remaining 15% were redeemed, bringing the total redemption to 100%, the
total revenue that the company would recognize over the three-year period would be P120,000. Thus, in
the third year, the company recognizes revenue of P8,000 due to redemption of loyalty awards.

Total market value of award points P120,000

Less: revenue from previous redemptions 102,000
Revenue recognized in the third year P 8,000

Awards Supplied by a Third Party

If an award is supplied by a third party, the amount received as consideration for goods or
services sold is recognized as revenue in full, and an expense is recognized for the points granted to
customers.