FRS 115 supersedes INT FRS 113 Customer loyalty programs.
Similar to INT FRS 113, an entity should determine that whether the loyalty program is a performance obligation.
If the program is a performance obligation, the entity should allocate the transaction price to the program based on a relative stand-alone selling price basis. If the stand-alone selling price for a customer’s option to acquire additional goods or services is not directly observable, an entity shall estimate it.
Example
An entity has a customer loyalty programme that rewards a customer with one customer loyalty point for every CU10 of purchases. Each point is redeemable for a CU1 discount on any future purchases of the entity’s products. During a reporting period, customers purchase products for CU100,000 and earn 10,000 points that are redeemable for future purchases. The consideration is fixed and the stand-alone selling price of the purchased products is CU100,000. The entity expects 9,500 points to be redeemed. The entity estimates a standalone selling price of CU0.95 per point (totalling CU9,500) on the basis of the likelihood of redemption in accordance with paragraph B42 of FRS 115.
The points provide a material right to customers that they would not receive without entering into a contract. Consequently, the entity concludes that the promise to provide points to the customer is a performance obligation. The entity allocates the transaction price (CU100,000) to the product and the points on a relative stand-alone selling price basis as follows:
Product = CU100,000 × (CU100,000 stand-alone selling price ÷ CU109,500)
= CU91,324
Points = CU100,000 × (CU9,500 stand-alone selling price ÷ CU109,500)
= CU8,676
At the end of the first reporting period, 4,500 points have been redeemed and the entity continues to expect 9,500 points to be redeemed in total. The entity recognises revenue for the loyalty points of CU4,110 [(4,500 points ÷ 9,500 points) × CU8,676] and recognises a contract liability of CU4,566 (CU8,676 – CU4,110) for the unredeemed points at the end of the first reporting period.
At the end of the second reporting period, 8,500 points have been redeemed cumulatively. The entity updates its estimate of the points that will be redeemed and now expects that 9,700 points will be redeemed. The entity recognises revenue for the loyalty points of CU3,493 {[(8,500 total points redeemed ÷ 9,700 total points expected to be redeemed) × CU8,676 initial allocation] – CU4,110 recognised in the first reporting period}. The contract liability balance is CU1,073 (CU8,676 initial allocation – CU7,603 of cumulative revenue recognised).
Discount voucher
If an entity enters into a contract for a sale of goods and as part of the contract, the entity gives the customer a discount voucher, the entity needs to allocate consideration to discount voucher based on the expected value model.
Example 1
An entity enters into a contract for the sale of Product A for CU100. As part of the contract, the entity gives the customer a 40 per cent discount voucher for any future purchases up to CU100 in the next 30 days.
The entity accounts for the promise to provide the incremental discount as a performance obligation in the contract for the sale of Product A.
To estimate the stand-alone selling price of the discount voucher, the entity estimates an 80 per cent likelihood that a customer will redeem the voucher and that a customer will, on average, purchase CU50 of additional products.
Estimated stand-alone selling price of the discount voucher = CU50 average purchase price of additional products × 40 per cent incremental discount × 80 per cent likelihood of exercising the option
= CU16
The stand-alone selling prices of Product A and the discount voucher and the resulting allocation of the CU100 transaction price are as follows:
Product = CU100 × [CU100 / (CU100 + CU16)]
= CU86
Points = CU16 × [CU100 / (CU100 + CU16)]
= CU14
The entity allocates CU86 to Product A and recognises revenue for Product A when control transfers. The entity allocates CU14 to the discount voucher and recognises revenue for the voucher when the customer redeems it for goods or services or when it expires.
Example 2
Continuation from Example 1, if during entering into a contract for the sale of Product A for CU100, the entity intends to offer a 10 per cent discount on all sales during the next 30 days as part of a seasonal promotion. The 10 per cent discount cannot be used in addition to the 40 per cent discount voucher.
Because all customers will receive a 10 per cent discount on purchases during the next 30 days, the only discount that provides the customer with a material right is the discount that is incremental to that 10 per cent (ie the additional 30 per cent discount). The entity accounts for the promise to provide the incremental discount as a performance obligation in the contract for the sale of Product A.
Estimated stand-alone selling price of the discount voucher = CU50 average purchase price of additional products × 30 per cent incremental discount × 80 per cent likelihood of exercising the option
= CU12
The stand-alone selling prices of Product A and the discount voucher and the resulting allocation of the CU100 transaction price are as follows:
Product = CU100 × [CU100 / (CU100 + CU12)]
= CU89
Points = CU16 × [CU100 / (CU100 + CU12)]
= CU11
The entity allocates CU89 to Product A and recognises revenue for Product A when control transfers. The entity allocates CU11 to the discount voucher and recognises revenue for the voucher when the customer redeems it for goods or services or when it expires.