IFRS 15 Loyalty points

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spideyocd
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IFRS 15 Loyalty points

Post by spideyocd »

Hi, I know the basics of Accounting for Loyalty points in the sense that the revenue is booked proportionately inclusive of the price of the standalone goods and right to use loyalty points for future purchase.

However I'm unsure of the entries while redeeming especially if you redeem say $ 100 but use loyalty credits worth $10

loyalty credit assumed at 1% of price of goods. However no credit for price paid through loyalty credit

My entries currently are

For goods purchased for $1000

Cash Dr 1000

To Sales Cr 990

To Contract Liability 10

On redemption of $10 on $100 worth of goods purchased

Cash Dr 90

To Sales Cr 89.1

To Contract liability Cr 0.9



Contract liability Dr 10

To Sales Cr 10



Are these correct ?

If the COGS is 50% then how much of cost is debited in both entries?

In the first entry is COGS $450 or $500?

I think $495 [990/2] in the first and $49.55 [89.1+10]in the second

The logic is that unlike earlier revenue standard we don't consider the loyalty right as a form of payment which would necessiate a discount or similar debit in P&L
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Marek Muc
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Re: IFRS 15 Loyalty points

Post by Marek Muc »

the accounting entries are illustrated in these examples:
https://ifrscommunity.com/knowledge-bas ... rogrammes/

COGS is recognised irrespective of loyalty points
Leo
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Re: IFRS 15 Loyalty points

Post by Leo »

Following to Marek's example (thanks for sharing), I think the accounting scheme should be :
1000 initial sales
100 Stand alone price of loyalty points
1000*(1000/1100)=909
100*(100/1100)=91

Only if you assume there is 100% probability that client will use the points.

dt : Cash 1000
cr : Sales 909
cr : Contract liability 91
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exIFRS
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Re: IFRS 15 Loyalty points

Post by exIFRS »

Do the accounting right and the free coffees can be your
most profitable 😁
spideyocd
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Re: IFRS 15 Loyalty points

Post by spideyocd »

What I want to know is that whether the entry for redemption by debiting Contract liability and crediting revenue is passed once a year or on each redemption?

For eg what entries do I pass if a customer redeems $10 on a sale of $100 ? because I receive $90

Is it like this

Cash Dr 90
Contract liability Dr 10
To Sales Cr 100

Thanks again for your time
Leo
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Re: IFRS 15 Loyalty points

Post by Leo »

Hi, I understand your question, sorry. so the same customer who for the first time of his life went to store A, purchased 1000 euros of things and got 100 euros worth of loyalty points (every 10 euros spend, equal 1 euros saved), went back to the store a few days after and purchased lets say 100 euros of things, but paid only 90 euros because he used partially the loyalty points he's got the first time. Because the loyalty program was still on, so he was entitled to loyalty points for his second visit as well.

I think, please anyone correct me if I'm mistaken :
1rst time purchase, lets say 100% chance to redeem it all :
dt bank 1000
cr sales 909
cr Contract liabilities 91

2nd time purchase (went back to the store a few days after while the loyalty program was still on), and purchased 100 euros of things (always based on the same assumption of 100% redeemable probability):
dt bank 90
cr sales 82 (90/99*90)
cr contract liabilities 8 (9/99*90)

dt contract liabilities 9.1
cr sales 9.1

Does it make sense ?
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Marek Muc
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Re: IFRS 15 Loyalty points

Post by Marek Muc »

@spideyocd

your illustrative entries are correct,

you should debit contract liabilities at each reporting period,
and remember to track expired points
spideyocd
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Re: IFRS 15 Loyalty points

Post by spideyocd »

@leo

I was doing the same thing except

Contract liability Dr 10
To sales Cr 10

because he spent 10 euros

I didn't understand why

Contract liability Dr 9.1
To sales Cr 9.1 ?

Is it because the customer spent 10 euros which was 10% of his loyalty entitlement of 100 euros?

I think I get it now that customer can use 100 euros of loyalty entitlement but since contract liability is only 91 we have to debit contract liability based on the % of his entitlement in euros otherwise if he used 100 euros in one transaction contract liability would've been negative

Yes, @leo You're entries do make sense to me now

The only thing is that if his points expire we should treat it same as redemption

Did I understand right?
@leo and @Marek
spideyocd
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Re: IFRS 15 Loyalty points

Post by spideyocd »

Marek Muc wrote: 27 Jan 2022, 16:23 the accounting entries are illustrated in these examples:
https://ifrscommunity.com/knowledge-bas ... rogrammes/

COGS is recognised irrespective of loyalty points
So that means even though loyalty points revenue is recognised on redemption the cost will be recognised on the sale transaction?

Therefore in a Sale of $1000 if the cost is 50% the COGS will be $5000 irrespective of the fact the revenue related to the loyalty points is recorded when the customer redeems it

Won't that be against the matching concept if COGS is recorded in current year and redemption is in the next year?

Thanks again for the response
spideyocd
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Re: IFRS 15 Loyalty points

Post by spideyocd »

Leo wrote: 28 Jan 2022, 17:30 Hi, I understand your question, sorry. so the same customer who for the first time of his life went to store A, purchased 1000 euros of things and got 100 euros worth of loyalty points (every 10 euros spend, equal 1 euros saved), went back to the store a few days after and purchased lets say 100 euros of things, but paid only 90 euros because he used partially the loyalty points he's got the first time. Because the loyalty program was still on, so he was entitled to loyalty points for his second visit as well.

I think, please anyone correct me if I'm mistaken :
1rst time purchase, lets say 100% chance to redeem it all :
dt bank 1000
cr sales 909
cr Contract liabilities 91

2nd time purchase (went back to the store a few days after while the loyalty program was still on), and purchased 100 euros of things (always based on the same assumption of 100% redeemable probability):
dt bank 90
cr sales 82 (90/99*90)
cr contract liabilities 8 (9/99*90)

dt contract liabilities 9.1
cr sales 9.1

Does it make sense ?
Thanks for the quick response.

I've given a general reply so that everyone can see the post reply

Please share your opinion
Leo
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Re: IFRS 15 Loyalty points

Post by Leo »

Hi, your question was mine as well :) but I'd like to share with you my thoughts :

Given that the customer got 100 euros worth of loyalty points, and the only way for him to settle it all its to purchase again 1000 euros of goods, do you agree ?
Imagine that he came back to the store a few days after and bought exactly 1000 euros of goods. the accounting entries would be, for me :
dt cash 900
cr sales 820 (900/990*900)
cr loyalty points 80 (90/990*90)

dt contract liability 91
cr sales 91

At this point in time, the contract liability in the balance sheet was only 80 euros, from the 2nd purchase. Because he utilised 100% of the loyalty points he'd got the first time.

I'd like to share another example, if for the loyalty program was just an one-off thing launched by the store, the accounting entry on the second purchase would have been :
dt cash 900
cr sales 900

dt contract liability 91
cr sales 91

so the store has realised 1900 euros of sales in total which was the case. And the contract liability is 0.

That's why when the client purchased 100 worth of goods and paid 90, I debited contract liability with 9.1 which was 10% of 91, the initial contract liability from the first purchase.
spideyocd
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Re: IFRS 15 Loyalty points

Post by spideyocd »

Thanks. Great explanation.
The second entry would be if no one redeemed or the points expired for whatever reason

This confirms that I understood your logic correctly and actually accept and agree with it since it seems the only logical conclusion

Hopefully @Marek can confirm for both of us

Looking forward to share my other doubts in this great forum

Have quite a few amongst various standards!
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Marek Muc
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Re: IFRS 15 Loyalty points

Post by Marek Muc »

spideyocd wrote: 29 Jan 2022, 10:29 So that means even though loyalty points revenue is recognised on redemption the cost will be recognised on the sale transaction?

Therefore in a Sale of $1000 if the cost is 50% the COGS will be $5000 irrespective of the fact the revenue related to the loyalty points is recorded when the customer redeems it

Won't that be against the matching concept if COGS is recorded in current year and redemption is in the next year?

Thanks again for the response
You recognise COGS when you sell something, and the existence of a loyalty programme only means that the allocation of revenue needs more attention when compared to a cash sale. It other words, loyalty points don't come with COGS themselves, it's just a means of settlement.
Hopefully @Marek can confirm for both of us
I'm not sure what the question is. Please summarise your doubts and frame the question.
spideyocd
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Re: IFRS 15 Loyalty points

Post by spideyocd »

Sorry Marek,

I already understood about the COGS part

This was about the redemption entry when the customers redeems $10 out of his eligibility of $100 (on earlier purchase of $1000)

On his first purchase we had passed

Cash Dr 1000
Sales Cr 909
Contract liabilities Cr 91

Therefore on redemption I had suggested to pass

Cash Dr 90
To Sales Cr 82
To Contract liability Cr 8

Contract liability Dr 10 Because $10 was redeemed
To Sales Cr 10


But @ leo suggested that the entry be
Contract liability Dr 9.1 Because 10% of his eligibility was redeemed
To Sales Cr 9.1



This makes more sense than what I did because my way we'd run out of contract liability if he redeemed the whole eligibility in one go

He gave a nice explanation but i don't know how to tag you in different replies

I and @leo believe these entries are correct but like you to confirm it as well

Thanks
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Marek Muc
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Re: IFRS 15 Loyalty points

Post by Marek Muc »

I guess you need to outline the key terms of the loyalty program first and then add a description to each entry explaining how it corresponds to the program itself. Without it, no one will be able to tell if your entries are correct because we don't know what's happening in the program itself.
spideyocd
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Re: IFRS 15 Loyalty points

Post by spideyocd »

Hi Marek,

This is a possible loyalty scheme

Cost of goods sold (COGS)are assumed @50% of the selling price
loyalty points assumed at 10% of price of goods and equivalent eligibility to redeem in $
However no further credit for redemption made through loyalty credit

When the customer purchases $1000 worth of goods and is eligible for $100 worth of redeemable purchases
The entries passed are


Cash Dr 1000

Sales Cr 909 [1000*100/110]

Contract liabilities Cr 91 [1000*10/110]

The COGS entry would be

COGS Dr 500 [1000*50%]

To Inventory Cr 500

The Customer buys further goods of $100 and redeems $10 using loyalty points giving him further eligibility to purchase $9 worth of goods [10*10%]

The entries passed are

Cash Dr 90

To Sales Cr 82 [90*100/110]

To Contract liability Cr 8 [90*10/110]

Entry for transfer of contract liability to revenue

Contract liability Dr 9.1 [91*10/100]

To Sales Cr 9.1

The COGS for the $100 purchase would be entry would be

COGS Dr 500 [1000*50%]

To Inventory Cr 500

Hopefully this example is comprehensive enough.

Thanks again
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Marek Muc
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Re: IFRS 15 Loyalty points

Post by Marek Muc »

If your entries properly reflect the substance of the loyalty program then you're good to go
spideyocd
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Re: IFRS 15 Loyalty points

Post by spideyocd »

Marek Muc wrote: 01 Feb 2022, 10:45 If your entries properly reflect the substance of the loyalty program then you're good to go
Hi Marek,

Thanks for the reply
My initial confusion was taking $10 instead of $9.1 in the below entry
Entry for transfer of contract liability to revenue

Contract liability Dr 9.1 [91*10/100]

To Sales Cr 9.1
Then @leo explained that would be wrong because if he redeemed $100 we would have only $91 to transfer to revenue

The assumptions aside do you think the scheme of entries are as per IFRS 15?
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Marek Muc
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Re: IFRS 15 Loyalty points

Post by Marek Muc »

the scheme is in line with IFRS 15

as to the amounts to be deferred to, and recycled from, contract liabilities - it depends on the terms of the loyalty program in question
spideyocd
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Re: IFRS 15 Loyalty points

Post by spideyocd »

Marek Muc wrote: 02 Feb 2022, 12:07 the scheme is in line with IFRS 15

as to the amounts to be deferred to, and recycled from, contract liabilities - it depends on the terms of the loyalty program in question
Hi marek,

Thanks again, apologies for the repeated questions
as to the amounts to be deferred to, and recycled from, contract liabilities - it depends on the terms of the loyalty program in question
I'm thinking this refers to the terms regarding redemption, breakage or extension of loyalty entitlements along with the probability assumptions for redemption

So if we instead assumed that 90% of the customers loyalty entitlement would be used i.e $90 [$100*0.9] but the customer went ahead and used $100 of his loyalty entitlement then contract liability would be recycled to the extent amount debited earlier since we had debited contract liability (on initial purchase of $1000) less with 90% probability?

Thanks for providing me lots of clarity
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Marek Muc
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Re: IFRS 15 Loyalty points

Post by Marek Muc »

yes, in this case you simply recycle all of the previously recognised contract liability to revenue
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