Savings prize draw accounts

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hubertd
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Joined: 21 Jul 2020, 23:48

Savings prize draw accounts

Post by hubertd »

Hi everyone,

Just wanted to check your opinions on the accounting treatment of the following scheme:

We're going to introduce a new savings product paying c. 1% interest. The product will run for a 12 months period starting at the beginning of Jan 2022. It will have a monthly draw in which 10 prizes of £1500 are to be won per month. Once the winners of the draw have been randomly selected we will then pay the £1500 prize into their savings accounts.

My question is: would you simply book these prizes as interest costs each month or is any other booking arrangement more appropriate? This new savings product is run on a trail basis. We may be talking about much higher amounts being given out as prize money in the future.

Thanks
JRSB
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Location: UK

Re: Savings prize draw accounts

Post by JRSB »

In the UK there are premium bonds - Interest is allocated to winners rather than evenly. Luckily they report under IFRS.

1.3 Interest and prizes recognition
Interest and prizes are earned by investors in accordance
with the terms and conditions applicable to each product.
Interest is recognised in accordance with IFRS 9 using the
effective interest method. The effective interest method is a
method of calculating the amortised cost of a financial asset
or liability and of allocating the interest income or interest
expense over the expected life of a financial instrument.
Capitalised and accrued interest is included in interest
and prizes payable to investors in the Statement of
comprehensive income, and liability to investors in the
Statement of financial position. Capitalised interest is
interest that has been added to the customer’s investment
and may now be earning further interest in accordance with
the terms and conditions of the product. Accrued interest
is interest which has been earned but not yet capitalised.
Interest, where applicable, is accrued from the date of funds
received or most recent capitalisation to the end of the
accounting period.
The monthly Premium Bonds prizes are drawn on the first
day of the following month. The prizes are accrued for
Premium Bonds which are eligible and still held at the end
of each month.
Interest has been disclosed in accordance with IFRS 7 and
IAS 1 in these accounts.


https://nsandi-corporate.com/news-resea ... rt-2020-21# (second set of accounts in the AR).
Student of IFRS.
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Marek Muc
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Location: Warsaw, Poland

Re: Savings prize draw accounts

Post by Marek Muc »

to me, it's not an interest expense at all, I would account for it outside of financial instruments accounting

sounds more like a decrease of revenue earned from fees and commissions:
https://ifrscommunity.com/knowledge-bas ... a-customer
DJP
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Re: Savings prize draw accounts

Post by DJP »

I am inclined to agree with Marek in that this is not interest. Interest should mostly be compensation for time value and credit risk and this is not the case. I think I would include it in other finance expenses though, instead of a decrease in revenue. Also please note that you don't have a contractual obligation to pay the prize until it is awarded to specific savings accounts. Therefore, the prize is not a financial liability and should not be accrued as such.
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Marek Muc
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Re: Savings prize draw accounts

Post by Marek Muc »

... but it's a promise made to customers, even though a customer receiving the price may be specified at a later date. So I wouldn't wait with the recognition in P&L until the payment (credit) is effected
DJP
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Re: Savings prize draw accounts

Post by DJP »

You can argue that perhaps a provision needs to be made (IAS 37). In my opinion this is outside the scope of IFRS 9. You don't have a contractual agreement to pay that prize. Plus, if hypothetically all deposits are withdrawn before the prize draw, nothing will ever be paid. This is not a financial liability. It is a contingent liability.
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Marek Muc
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Re: Savings prize draw accounts

Post by Marek Muc »

I think we already agreed that this is out of the scope of IFRS 9

This is not in the scope of IAS 37 IMO as (presumably) this is a contractual obligation and therefore in the scope of IFRS 15
DJP
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Re: Savings prize draw accounts

Post by DJP »

What is the performance obligation though?
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Marek Muc
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Re: Savings prize draw accounts

Post by Marek Muc »

operating customer's bank accounts
DJP
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Re: Savings prize draw accounts

Post by DJP »

It is the bank that is paying for something, not the other way round. So what is the performance obligation?
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Marek Muc
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Re: Savings prize draw accounts

Post by Marek Muc »

you're taking it out of context IMO - the bank is repaying a tiny bit of fees earned from customers
DJP
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Re: Savings prize draw accounts

Post by DJP »

I'm not convinced. There may not be any fees charged to customers to start with. This looks more akin to a marketing expense to attract funding.
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Marek Muc
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Re: Savings prize draw accounts

Post by Marek Muc »

That may be a good solution too, to treat is as marketing expense (outside of finance costs). But this may not be in line with IFRS 15 is one believes we're in its scope.
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