Abstract
Orientation: The literature does not provide illustrative examples of specific credit card rewards programme (CCRP) transactions.
Research purpose: The objective of the research was to develop and confirm illustrative examples for co-brand CCRPs, complex CCRPs and CCRPs offering cash rewards after the effective date of International Financial Reporting Standard (IFRS) 15.
Motivation for the study: Credit card rewards programme management in practice acknowledged the need for illustrative examples of accounting for CCRP transactions.
Research approach/design and method: This qualitative study used document analysis to develop the illustrative examples; and to confirm the examples, the Delphi technique was applied.
Main findings: Illustrative examples were developed (based on existing literature, including IFRS) that show the differences in accounting treatment based on the type of CCRP. The initial recognition of the award credits liability, the proportionate derecognition of the liability when award credits are redeemed, and a change in the expected redemption rate are included in the examples. The study also clearly indicates the differences in the structure and functioning of each type of CCRP that support the different accounting treatments suggested.
Practical/managerial implications: This study contributes to practice by providing CCRPs with illustrative examples that could reduce uncertainty and inconsistencies in practice. The illustrative examples developed make the theory – specifically principle-based IFRS – more practical and could improve faithful representation, as well as make transactions easier to verify (audit).
Contribution/value-add: This study underscores the need for educators to train students in applying principle-based standards like IFRS 15 to complex transactions, fostering critical thinking and workplace readiness.
Keywords: illustrative examples; credit card rewards programmes; IFRS 15; complex CCRPs; co-brand CCRPs; cash reward CCRPs.
Introduction
The lack of guidance provided to credit card rewards programmes (CCRPs) in International Financial Reporting Standard (IFRS) 15 – Revenue from Contracts with Customers, creates uncertainty among these programmes, which results in inconsistent accounting practices (Brink 2017a, 2017b; Chapple, Moerman & Rudkin 2010; Pidduck et al. 2019). Credit card rewards programmes have been described as complex agreements with multiple parties involved, which can be structured in a variety of ways (Brink 2017a; Brink, Steenkamp & Odendaal 2023; EY 2013). Credit card rewards programmes transactions can be perceived as similar, and accountants try to account for comparable transactions in a consistent manner across different entities. Nonetheless, given the complexity of CCRPs and the fact that every transaction is different within each CCRP, CCRPs might not be appropriate for uniform accounting treatment. As such, a different accounting treatment might be required for each unique CCRP transaction (Brink et al. 2023). Given the increasing popularity of CCRPs, it is essential to ensure that CCRP transactions are faithfully represented in the annual financial statements to provide decision-useful financial information. In addition, the rand amount of CCRP award credits granted is substantial; for example, the CCRP expenditure (netted against fee and commission income) disclosed by FirstRand (2023) amounted to R2 180 million (with an outstanding liability of R2 069 million) in the 2023 financial year.
While some guidelines in the IFRS are clear and straightforward, others are vague and necessitate management’s judgement (Han, Chand & Mala 2019; Oro & Klann 2018; Pan & Patel 2017). In such cases, management can refer to the illustrative examples that accompany most IFRS. Aspects covered in a specific IFRS are illustrated in these examples and can assist management in accounting for complex transactions. International Financial Reporting Standard 15, which is a principle-based standard, includes illustrative examples (IASB 2014c). However, there is only one example that relates to customer loyalty programmes, namely Illustrative Example 52; but this example specifically excludes CCRPs (Brink 2017a). The IFRS therefore offer no illustrative examples of CCRPs.
Credit card rewards programmes can be categorised based on their structure and functioning as one of the following: simple CCRPs (swipe only), co-brand CCRPs, and complex CCRPs (Brink 2023). In a simple CCRP, the financial institution grants award credits on each eligible credit card transaction. In a co-brand CCRP, a retailer partners with a financial institution to issue a co-brand credit card offering a CCRP. The award credits granted in complex CCRPs are not only linked to credit card spend, but also to other products that the financial institution offers (e.g., insurance and loans) (Brink et al. 2023). The underlying transactions in each of these CCRPs’ structures and functioning differ and affect the accounting treatment of CCRP transactions (Brink et al. 2023). Brink (2024) identified a gap in the current body of accounting knowledge, namely that no illustrative examples have been developed for CCRPs. There is thus no clarity and certainty provided to CCRPs on how to apply the IFRS to different CCRP transactions and faithfully account for these transactions. Given this lack of guidance provided in the IFRS and existing literature, the motivation behind Brink’s (2024) study was based on CCRP management in practice that expressed their need for such examples. Specific comments included: (1) to supplement the rules (which are abstract), practical examples should be developed; (2) illustrative examples will drive home the message provided by IFRS; and (3) providing examples with journal entries will assist to account for the CCRP transactions in practice. Illustrative examples therefore provide the opportunity to bridge the gap between theory and practice. As a starting point, Brink (2024) developed illustrative examples of simple CCRPs. The scope of that study focussed on simple CCRPs and excluded co-brand CCRPs and complex CCRPs. It was thus recommended to also develop illustrative examples for co-brand CCRPs and complex CCRPs as an area for future research. Even though simple CCRPs can also offer cardholders the opportunity to redeem award credits for a direct cashback, an illustrative example of this scenario was not included in Brink’s (2024) study.
The objective of the research reported in this article was to develop illustrative examples of co-brand CCRPs, complex CCRPs, and CCRPs offering cash rewards after the effective date of IFRS 15 to address the perception that all CCRPs should be accounted for in a similar manner. This study adds to the literature by highlighting that, despite the apparent similarity of CCRP transactions, different types of CCRPs require distinct accounting treatments. This study contributes to practice by providing CCRP management with illustrative examples of the accounting treatment of co-brand CCRPs, complex CCRPs, and CCRPs offering cash rewards. These illustrative examples that make the theory (more specifically principle-based IFRS)1 practical, could assist CCRP management in their application of judgement when accounting for CCRP transactions, while simultaneously reducing uncertainty, ensuring faithful representation of the underlying CCRP transaction, and increasing comparability between similar companies, which will ultimately benefit the users of financial statements.
Literature review
Applying principle-based accounting standards to very specific and complex transactions comes with various challenges, as was evident with the issue of IFRS 15 (KPMG 2013; PwC 2012).
Firstly, this literature review discusses the implications of implementing a new accounting standard (IFRS 15). Secondly, the functioning of co-brand and complex CCRPs is discussed, and thirdly the focus shifts to accounting for CCRP transaction.
Implications of implementing International Financial Reporting Standard 15
Implementing a new accounting standard, such as IFRS 15, carries several implications for preparers (Davern et al. 2019; Napier & Stadler 2020; Onie et al. 2023). The telecommunication, retail, oil and gas, and construction industries all faced challenges in applying the principle-based guidance of IFRS 15 (Ogunode & Salawu 2021; PwC 2018a; Usurelu & Dutescu 2021; Van Wyk & Coetsee 2020). In most cases where a standard lacks industry-specific guidance, practitioner reports2 are issued to provide the relevant guidance (e.g., PwC 2018a, 2018b). Credit card rewards programmes transactions, being but one transaction within the financial services industry, is very specific. PwC (2016) issued a practitioner report providing an overview of the accounting requirements of the new standard as it pertains to customer loyalty programmes. This report, however, contained no specific guidance for CCRPs.
For CCRPs, the main debate and challenge with the introduction of IFRS 15 was whether CCRPs were included in the scope of IFRS 15 (EY 2014; FASB & IASB 2013). The scope of IFRS 15 states that an entity shall apply IFRS 15 to a contract only if the counterparty to the contract is a customer (IASB 2014a). If the cardholder is identified as the customer, then the CCRP falls within the scope of IFRS 15; and if the merchant is identified as the customer, the CCRP falls outside the scope of IFRS 15. It is also possible to identify both the merchant and the cardholder as the card issuer’s customer; however, then a part of the transaction falls outside the scope of IFRS 15 and a part of the transaction falls within the scope of IFRS 15 (Brink 2017a). Other concerns with the introduction of IFRS 15 included the different treatment for cash versus non-cash rewards, interaction with financial instruments, identifying the relevant revenue stream and value of award credits without an observable value (Brink 2017b; IFRS 2012).
The functioning of co-brand and complex credit card rewards programmes
The underlying transaction in the structure and functioning of the specific type of CCRP should be considered in order to faithfully account for the CCRP transaction (Amalyan & Amalian 2015; Brink et al. 2023; Sava 2014). To understand why different CCRPs require different accounting treatments and to emphasise the contribution of this study, a brief discussion of the structure and functioning of each type of CCRP follows (refer to Appendix 1 for figures illustrating the different CCRPs’ structure and functioning). Each type of CCRP’s structure and functioning can then be linked to the accounting treatment, as discussed in the next section. The structure and functioning of simple CCRPs are straightforward and clearly documented on the websites of the various simple CCRPs (Brink et al. 2023). The functioning of a simple CCRP, also referred to as a swipe-only CCRP, can be described as follows. As part of a credit card arrangement, the financial institution that issues a credit card administers a CCRP. Award credits are granted for each eligible credit card transaction in terms of the rewards programme. Some simple CCRPs’ award credits can be redeemed for cash (at the financial institution). Other simple CCRPs’ cardholders have a redemption choice and can redeem award credits for cash (at the financial institution) or for goods or services (at the financial institution or programme partners) (Brink et al. 2023).
The structure and functioning of co-brand CCRPs and complex CCRPs are not evident from investigating the terms and conditions on the websites of these CCRPs (Brink et al. 2023). Only recently have the structure and functioning of these CCRPs been investigated and documented (Brink et al. 2023). Two main parties are involved in a co-brand CCRP, namely a financial institution and a retailer. The financial institution is responsible for issuing the credit card and facilitating electronic payment. The retailer is effectively responsible for the rewards programme. Award credits are earned on eligible credit card transactions, but the financial institution sells the obligation to provide goods or services with the redemption of award credits to the retailer at a contractually agreed-upon rate per award credit granted. The retailer in effect takes over the award credits liability and is thus responsible for providing goods or services or to pay a programme partner consideration for providing the goods or services. Typically, these programmes only offer redemption opportunities for goods or services (and not for cash) at the retailer or at various programme partners (Brink et al. 2023).
The rewards in a complex CCRP are linked to the credit card transaction and to other products the financial institution offers. The mechanism of linking the credit card transaction with certain behaviours acts as a multiplier of the rewards, which means that the award credits are all linked and the CCRP transaction cannot be split out separately. The product houses and the rewards programme can be divided into separate departments or separate companies, and the rewards programme charges the various product houses an access fee to run the rewards programme (Brink et al. 2023). These access fees received result in a ‘pool’ of revenue that is utilised to fund the rewards expenses. Some complex CCRPs’ award credits can be redeemed for cash (at the financial institution). Other complex CCRPs’ cardholders have a redemption choice and can redeem award credits for cash (at the financial institution) or for goods or services (at the financial institution or programme partners) (Brink et al. 2023). For the complex CCRP, Brink, Steenkamp and Odendaal (2024) found that the CCRP transaction is likely to be regarded as part of an integrated revenue transaction.
The description of the structure and functioning of co-brand CCRPs and complex CCRPs includes what is evident in the limited available literature. Credit card rewards programmes are unique and vary in their structure and functioning and it is possible that there are elements that are not covered in these descriptions.
Accounting for credit card rewards programme transactions
The accounting treatment of a simple CCRP is discussed first and is then compared to the accounting treatment of a co-brand and a complex CCRP with reference to the differences in structure and functioning. This discussion indicates the differences in accounting for the award credits based on each unique type of CCRP. When a simple CCRP transaction is viewed as a marketing tool and the nature of the benefits is a non-cash reward,3 award credits will be accounted for in terms of International Accounting Standard (IAS) 37 – Provisions, Contingent Liabilities and Contingent Assets as a marketing expense and a provision (Brink et al. 2024). When a simple CCRP transaction is viewed as part of an integrated revenue transaction and the nature of the benefits is a non-cash reward, award credits will be accounted for in terms of IFRS 15 (Brink & Steenkamp 2023). Either the interchange fee or the membership fee can be identified as the relevant revenue stream in the transaction. In both cases, two performance obligations arise (the service of electronic payment facilitation or the service of running the rewards programme and the granting of award credits) and the transaction price is allocated to these performance obligations based on relative stand-alone selling prices (Brink 2024). Award credits will therefore initially be accounted for as a reduction of revenue by recognising a contract liability (deferring the revenue) and recognising revenue as and when award credits are redeemed (Brink et al. 2024). When the nature of the benefits provided by a CCRP is cash only, award credits will be accounted for in terms of IFRS 9 – Financial Instruments as an expense and a financial liability (Brink & Steenkamp 2023).
In a co-brand CCRP, the retailer is effectively responsible for the rewards programme and the CCRP transaction must be accounted for in the retailer’s annual financial statements. Regardless of whether the CCRP transaction forms part of the retailer’s main business in delivering goods or services when award credits are redeemed (constituting revenue) or not forming part of its main business when paying programme partners consideration for providing goods or services (constituting income), IFRS 15 can be applied in both scenarios. This is owing to the principles of IAS 8 – Accounting Policies, Changes in Accounting Estimates and Errors; in other words, in the absence of a specific IFRS applying to a transaction, management can refer to similar standards to develop an appropriate approach (IASB 1993). Considering the CCRP transaction, the primary driver of the retailer is to receive consideration for taking over the award credits liability from the financial institution. The relevant revenue stream in the CCRP transaction is therefore the consideration received from the financial institution (Brink & Steenkamp 2023). International Financial Reporting Standard 15 will also be applicable, but unlike a simple CCRP transaction (which is viewed as part of an integrated revenue transaction and the nature of the benefits is a non-cash reward), a different revenue stream is identified in a co-brand CCRP. There is also only one performance obligation, namely to deliver goods or services when award credits are redeemed or to pay programme partners consideration for providing goods or services. As award credits are not redeemable for cash, there would not be a scenario where IFRS 9 would be applicable.
In a complex CCRP, there are multiple revenue streams (e.g. interchange fee, membership fee, and revenue generated by product houses) coming from various cardholders and there is no direct link between the multiple revenue streams and the award credits liability per cardholder. It differs from a simple CCRP (where the IFRS 15 deferral model would typically be applicable) where the cardholders swipe their credit card (which generates a single revenue stream, i.e. the interchange fee) and award credits are granted (resulting in a direct link between the revenue and the award credits liability per cardholder). However, the nature of the transaction still indicates that it forms part of a revenue transaction. There is a relationship with the customer and IFRS 15 is therefore applicable if the nature of the benefits is a non-cash reward, even if it is not the IFRS 15 deferred revenue model (allocating the transaction price between the relevant revenue stream and the award credits granted) (Brink et al. 2024). If the nature of the benefits provided by a complex CCRP is a cash reward, the award credits should be accounted for in terms of IFRS 9 (expense and financial liability).
Methods and data collection
Coetsee (2019) found that doctrinal research is a viable research approach within the accounting discipline and previous accounting studies have also applied doctrinal research in applying IFRS 15 to a complex transaction (Coetsee & Van Wyk 2020). Qualitative document analysis, being doctrinal in nature, was regarded as an appropriate choice as it is especially suited for in-depth studies that generate detailed descriptions of a specific phenomenon (Bowen 2009). For the purposes of this study, the documents mainly included prior literature (academic and from practice) and relevant IFRS. The selection of the documents was based on the aim of the study (Morgan 2022) and on the four factors as identified by Flick (2018), namely, authenticity, credibility, representativeness and meaning.
The researcher employed a systematic approach to review and interpret these documents, aiming to derive meaning, enhance understanding, and generate empirical knowledge (Bowen 2009; Corbin & Strauss 2008; Morgan 2022) to develop the illustrative examples. This process involved locating, evaluating and synthesising data, which was then organised into themes through an iterative process combining elements of content analysis and thematic analysis (Bowen 2009; Braun & Clarke 2006; Hutchinson & Duncan 2012; Labuschagne 2003; Morgan 2022).
It was first necessary to understand each type of CCRP’s underlying transaction (before critically evaluating the accounting treatments) and this was done with reference to relevant literature (Hutchinson & Duncan 2012). Relevant literature included all customer loyalty programme (including CCRPs) related studies that could be identified. Considering the accounting treatment of various types of CCRP transactions, relevant IFRS were identified (representing the sources of law i.e., the rules and principles that govern the accounting discipline) (Coetsee & Van Wyk 2020; Hutchinson & Duncan 2012) including IAS 37 – Provisions, Contingent Liabilities and Contingent Assets, IFRS 15 and IFRS 9.
The researcher read and re-read all identified documents facilitating familiarisation with the data, and initial areas of interest were identified through writing down preliminary observations (Braun & Clarke 2006). The researcher organised information obtained from identified data into categories, making a clear distinction between meaningful and relevant data and irrelevant data (Bowen 2009; Corbin & Strauss 2008). For example, studies purely focussing on customer loyalty programmes, excluding CCRPs, were omitted. The researcher considered all documents with a critical eye and endeavoured to establish the meaning of the document and its contribution to the phenomenon under study (Bowen 2009). For example, if literature indicated a specific accounting treatment, the treatment was tested against IFRS requirements. Relating to previous customer loyalty programme studies, the entire article was examined and not merely the findings (Bowen 2009). The researcher searched for themes within the data that directly related to the research’s aim of developing illustrative examples for co-brand, complex and cash-reward CCRPs (Braun & Clarke 2006).
After obtaining a thorough understanding of the functioning of different types of CCRPs, the accounting treatment could be formulated by considering literature and relevant IFRS. The principles outlined in the identified IFRS were interpreted and analysed within the context of CCRP transactions (Coetsee & Van Wyk 2020; Hutchinson & Duncan 2012) for purposes of developing the illustrative examples. The accounting rules that govern CCRP transactions were systematically outlined, and the researcher considered the relationships between various rules to understand any potential problem areas (Hutchinson & Duncan 2012). The specific IFRS requirements were taken into consideration, and relevant issues pertaining to accounting for CCRP transactions were synthesised to draw sound and effective conclusions applying logical argumentation (Hutchinson & Duncan 2012; Van Der Spuy 2015).
A limitation of document analysis is that the preliminary illustrative examples were based solely on the researcher’s interpretation of the available documents. This limitation was addressed by triangulating4 the Delphi technique (as explained further on) with document analysis, which offered a more comprehensive understanding of the phenomenon and enhanced the credibility of the findings (Bloomberg & Volpe 2016; Bowen 2009).
The Delphi technique was used to confirm and validate the developed illustrative examples. The Delphi technique enabled the researcher to reach consensus and address complexity and uncertainty in a field where knowledge is unknown, lacking or faulty (Amos & Pearse 2008; Donohoe & Needham 2009). Care should be taken when selecting the panel of experts to participate in the Delphi technique, as the effectiveness of the technique depends on this selection (Chan et al. 2001; Clayton 1997). To confirm the illustrative examples, the researcher selected experts from South Africa. To address the problem of accounting for CCRP transactions globally, South Africa can be regarded as a good starting point because the country has a dual economy with characteristics of both a developed and an emerging economy, and South African CCRPs are Johannesburg Stock Exchange (JSE)-listed businesses with sophisticated financial reporting (Brink et al. 2024). Twelve CCRPs currently operate in South Africa (Brink et al. 2024), which consist of three simple CCRPs, five co-brand CCRPs, and four complex CCRPs. Only one CCRP in South Africa offers a direct cashback reward.
The people directly involved in the CCRP transaction would be able to provide rich and descriptive data relating to the phenomenon under study. Therefore, the heads of the CCRPs and the accountants of all South African co-brand and complex CCRPs (including the CCRP offering the direct cashback reward) and their audit partners were purposively selected and invited to participate in the study. This approach will facilitate obtaining an information-rich sample from which the most can be learned about the phenomenon under study (Creswell & Guetterman 2019; Merriam & Tisdell 2016). These selected experts have different skills and expertise, and could each contribute to the development of illustrative examples in a different manner. In total, nine experts (referred to as P1 to P9) participated in the Delphi technique. The organisations that ran a CCRP and the audit firms granted institutional permission, and the heads of the CCRPs, accountants and audit partners who agreed to take part in the research provided informed consent. Ethical clearance was obtained prior to commencing with the research.
The Delphi technique involved multiple rounds, each of which improved on the outcomes of the preceding one to create consensus in the final round (De Villiers, De Villiers & Kent 2005). A video was developed that talked through the illustrative examples to ensure a user-friendly experience for the panel of experts and to assist them in working through the examples. The illustrative examples, together with the video and a questionnaire, were sent to the panel of experts for the purposes of the first round. The questionnaire included questions relating to the accuracy and completeness of the illustrative examples. In-depth feedback was obtained from the nine experts and the data were analysed and, where necessary, the illustrative examples were adjusted.
The revised version of the illustrative examples was presented to the same panel members in the second round and was accompanied by a detailed description of the adjustments based on the feedback received from the first round. The questionnaire for the second round enquired whether the panel members were satisfied with the revised illustrative examples and, if not, recommendations for further adjustments were requested. No participants required any further adjustments. After two rounds of the Delphi technique, optimal data saturation and collective agreement were achieved; another round was therefore not necessary (Vernon 2008).
It was decided to use thematic analysis to analyse the data collected from the experts, as this enabled the researcher to recognise themes, patterns and regularities that were revealed by the perspectives of the participants. This study used Braun and Clarke’s (2006) guide for thematically analysing data obtained from the Delphi technique. Expert feedback was repeatedly reviewed to become familiar with the data. Initial areas of interest were noted, and data were systematically coded and organised. The researcher then identified themes by clustering codes around meaningful patterns related to the research aim. Examples of codes included ‘retailer receiving cash for taking over the award credits liability’ and ‘award credits regarded as an IFRS 9 financial liability’ while themes included ‘clarifications requested’ and ‘suggestions for adjustments’. Codes and themes were reviewed and refined to create a thematic map, and findings were structured accordingly. Quotes were reassigned to themes to accurately represent the data’s narrative. The identified themes were applied to adjust and eventually to confirm the illustrative examples developed.
Ethical considerations
The research study was submitted to the Economic and Management Sciences Departmental Ethics Screening Committee (DESC) and, after approval, the application was forwarded to Stellenbosch University’s Social, Behavioural and Education Research and Ethics Committee (REC:SBE), for final ethics approval, which was also granted prior to commencing with the study (Project number: 17134).
Results and discussion
Confirming the illustrative examples
Eight of the nine participants (P2–P9) agreed with the accounting treatment illustrated in the examples; however, some participants requested clarifications and made other suggestions for improvement. Participant 1 agreed with Examples 1 and 2 and suggested an adjustment to Example 3 (as discussed later in this section). Participant 2 remarked: ‘Congratulations on excellent work done’. According to Participant 3, the high-level accounting treatment as illustrated in the examples made sense. Participants 7 and 9 enjoyed working through the examples, and Participant 7 mentioned that the video was very helpful.
Participant 1 agreed with the accounting treatment presented in Example 1, but mentioned that she believed there was more than one correct way to account for the change in estimates relating to the expected redemption rate. This participant stated that it was important to apply the chosen method consistently on a reasonable basis or by using a reasonable approach (P1). Participants 3 and 4 recommended the following clarifications for Example 1:
- The accounting treatment presented are in the records of the retailer (P3).
- The financial institution releases the obligation to the retailer (P3).
- The retailer receives cash for taking over the award credits liability (P3; P4).
Participant 1 agreed with the accounting treatment presented in Example 2. She specifically mentioned that she agreed that the revenue should be reduced on Day 1. The unwinding of the award credits liability can, however, be accounted for in different ways (P1). International Financial Reporting Standard 15 provides certain guidelines and users should consider materiality and reaching an answer that logically makes sense in applying these guidelines (P1). For both Examples 1 and 2, this participant did not provide details on an alternative accounting treatment. Participants 6, 7 and 8 mentioned that IFRS 15, par. B42, can be applied to determine the relative stand-alone selling prices for allocation purposes in scenarios where allocating the transaction price based on relative stand-alone selling prices is not regarded as impractical. This suggestion was incorporated into Example 2.
Participant 4 questioned whether the award credits in Example 2 (which can be redeemed for cash or goods and services) should be regarded as a cash reward. Theoretically, when cardholders have a choice regarding the nature of the benefits, the CCRP still has a contractual obligation to provide cash (i.e. the cardholder has the right to demand cash back), which results in the CCRP liability being classified as a financial liability in terms of IAS 32 – Financial Instruments: Presentation and should be accounted for in terms of IFRS 9 – Financial Instruments (Brink & Steenkamp 2023). However Brink et al. (2023) found, based on interviews conducted with CCRP management in practice, that all participants viewed the nature of the benefits as a non-cash reward even though the rewards programme provides a redemption choice between cash and goods or services. The nature of the benefits is points-based and the cardholder must first exercise a choice (cash, or goods or services) before it acts like cash, and there is no immediate access to the cash (Brink et al. 2023). It was, however, decided to clarify this classification in Example 2 to avoid confusion.
If, however, award credits granted are classified as a cash back reward, one should consider IFRS 15 guidance on consideration payable to a customer (P4). For a direct cash back to be viewed as consideration payable to a customer and deducted off the transaction price, the CCRP transaction must fall within the ambit of IFRS 15, and the award credits must not be regarded as a distinct performance obligation. In scenarios where IFRS 15 is applicable to the CCRP transaction, the award credits would normally be identified as a distinct performance obligation, because it constitutes a customer option for additional goods and services. In many instances, an automatic direct cash back (cash rewards) would be scoped out of IFRS 15 and accounted for as a financial liability in terms of IFRS 9. The consideration payable to a customer would therefore not be applicable to a CCRP transaction.
Pertaining to Example 2, Participant 5 requested clarification on the adjustment made based on a change in the expected redemption rate at the end of the first reporting period. An explanation and relevant paragraphs from IFRS 15 were included in the example for completeness’ sake and to avoid confusion.
Participant 1 was of the opinion that there should be a reduction of revenue in Example 3’s transaction. Technically, the customer receives something similar to a discount or a rebate that should reduce the transaction price (P1). For any payment to a customer that is linked to a revenue transaction, one must first consider IFRS 15 from an income statement perspective (P1). According to Participant 1, the transaction can fall partly within IFRS 15 and IFRS 9. Example 3 was adjusted based on this comment.
Participant 2 explained that for some CCRPs that offer a direct cashback reward, the terms and conditions of the programme can determine that the cashback is first placed in a ‘wallet’ and requires cardholders to transfer the cash to a current account before it can be withdrawn. Participant 2 recommended that Example 3 be expanded to cater for such a scenario.
Participant 1 and 3 mentioned that the examples missed principal versus agent considerations that bring about various other complexities. The principal versus agent considerations were, however, excluded from the scope of the study as they were already covered in Brink et al. (2024). Participant 9 questioned whether the time value of money should be considered in determining the value of the award credits. The award credits of some CCRPs have no expiry date; the possibility of taking time value of money into account should therefore be considered. During the process of compiling IFRS 15, the IASB indicated that customer loyalty programmes are not required to measure the award credits at their present value because the cost will outweigh the perceived benefit (IFRS 2014; PwC 2016). For CCRP transactions accounted for using IFRS 15, the contract liability would therefore not be adjusted for the time value of money.
Participant 2 and 5 recommended including a reference to award credits that are forfeited; for example, award credits with an expiry date that lapses, a cardholder that closes their account without exchanging award credits, or a deceased cardholder with an award credits balance. This will be taken into account when the expected redemption rate is calculated.
Illustrative examples
Illustrative examples were developed to provide guidance and certainty regarding co-brand CCRPs, complex CCRPs, and CCRPs offering cash rewards in accounting for their CCRP transactions. These included initial recognition of the liability, the derecognition of the liability and a change in the expected redemption rate (where applicable).
Example 1: Co-brand credit card rewards programme where the retailer takes over the award credits liability
A financial institution that issues a credit card operates a co-brand CCRP. In terms of the rewards programme, the cardholders earn one award credit for every 1000 currency unit(s) (CU[s]) spent on their credit cards. Each award credit is redeemable for CU1 discount on future purchases of goods or services offered by the retailer or any of the programme partners. The financial institution sells the obligation to provide goods or services with the redemption of award credits to the retailer at a contractually agreed-upon rate of CU0.90 per award credit granted; thus releasing the obligation to the retailer. The estimated cost for the retailer to provide goods or services or to pay a programme partner consideration for providing goods or services with the redemption of one award credit amounts to CU0.80. Therefore, a margin of CU0.10 is added to arrive at the contractually agreed-upon rate of CU0.90. During the first reporting period, cardholders made purchases with their credit cards amounting to CUs100 000 000 and the financial institution sold the 100 000 award credits granted during the reporting period to the retailer. The retailer therefore received CUs90 000 (100 000 × CU0.90) for taking over the award credits liability during the reporting period. Based on historical data, it is expected that 85% of the award credits granted will be redeemed.
When the retailer provides its normal goods or services to honour the award credit liability, such transactions will form part of its main business (constituting revenue), but if the retailer pays a programme partner consideration for providing goods or services, such a transaction will not form part of its main business (constituting income). However, in both scenarios, IFRS 15 can be applied owing to the principles of IAS 8 (i.e. in the absence of a specific IFRS applying to a transaction, management can refer to similar standards to develop an appropriate approach).
When applying the principles of IFRS 15, the following is applicable. There is a contractual agreement between the retailer and the financial institution that determines that the retailer will take over the award credits liability in exchange for consideration. The customer, in relation to the retailer for the consideration received (relevant revenue stream), is therefore the financial institution. Even though the retailer provides goods or services to cardholders (in terms of the CCRP transaction), the retailer does so to honour the contract with the financial institution (taking over the award credits liability). For the retailer, there is a single performance obligation, namely to provide goods or services or to pay a programme partner consideration for providing goods or services with the redemption of award credits. The transaction price amounts to the CUs90 000 received. In terms of IFRS 15, upon receipt of a prepayment from a customer, an entity will recognise a contract liability in the amount of the prepayment for its performance obligation (IFRS 15, par. B44). In terms of IFRS 15, the retailer shall therefore initially recognise the contract liability (for the award credits granted) at the value of the consideration received, which is CUs90 000 (representing the transaction price). If an entity expects to be entitled to a breakage amount in a contract liability, the entity shall recognise the expected breakage amount as revenue in proportion to the pattern of rights exercised by the customer (IFRS 15, par. B46).
At the end of the first reporting period, 50 000 award credits were redeemed at the retailer for services and the retailer continues to expect 85 000 award credits to be redeemed in total at the retailer (85%). The nature of its promise is a performance obligation to provide the specified goods or services itself and the retailer collects the consideration allocated to the award credits on its own account, thereby acting as the principal in the transaction (applying IFRS 15, par. B34). As the retailer satisfies the performance obligation, the retailer recognises revenue as the gross amount of consideration that it expects to be entitled to in exchange for the services transferred (IFRS 15, par. B35). The retailer is entitled to a breakage amount and recognises the expected breakage amount as revenue in proportion to the pattern of rights exercised by the cardholder (IFRS 15, par. B46). The retailer recognises revenue for the award credits of CUs52 941 ([50 000 ÷ 85 000] × CU90 000) in terms of the award credits redeemed.
During the second reporting period, an additional 30 000 award credits are redeemed at the retailer for services (cumulative award credits redeemed are 80 000) and the retailer now expects that 87 000 award credits will be redeemed in total (87%). The increase in the expected redemption rate (from 85% to 87%) is taken into account when the portion of deferred revenue to be recognised is calculated. The cumulative revenue that the retailer recognises is CUs82 759 ([80 000 award credits redeemed ÷ 87 000 expected award credits to be redeemed in total] × CUs90 000). The retailer recognised CUs52 941 of the deferred revenue in the first reporting period; it therefore recognises revenue for the award credits of CU29 818 (CU82 759 – CU52 941) in the second reporting period.
In the third reporting period, an additional 7000 award credits are redeemed (cumulative award credits redeemed are 87 000). The retailer expects that no additional award credits will be redeemed. The retailer has already recognised CUs82 759 of the deferred revenue; it therefore recognises the remaining revenue for the award credits of CUs7241 (CUs90 000 – CUs82 759). The journal entries to account for the retailer taking over the award credit liability initially and the recognition of revenue as award credits are redeemed where the retailer acts as a principal applying IFRS 15 in the records of the retailer are illustrated in Table 1.
| TABLE 1: General journal entries for the retailer accounting for taking over the award credits liability in a co-brand credit card rewards programme where the retailer acts as the principal. |
If the co-brand CCRP views the transaction as a marketing tool (and the nature of the benefits is a non-cash reward), award credits will be accounted for in terms of IAS 37 – Provisions, Contingent Liabilities and Contingent Assets as a marketing expense and a provision (Brink et al. 2024). The accounting treatment of such an example would be similar to a simple CCRP viewing the transaction as a marketing tool (Brink 2024).
Example 2: Complex credit card rewards programme receiving multiple revenue streams
A financial institution that issues a credit card operates a complex CCRP. The rewards programme is linked to other products of the financial institution (e.g. insurance and loans), which enables multiple products held by the cardholders to lead to increased earnings of award credits when the cardholders use their credit cards. The product houses and the rewards programme are divided into separate departments and the rewards programme charges the various product houses a monthly access fee to run the rewards programme. The access fee (received indirectly from the cardholders) thus consists of multiple revenue streams (e.g. interchange fee, membership fee and revenue generated by product houses). The total amount of access fees received by the rewards programme from the product houses for the first reporting period amounts to CUs250 000.
In terms of the rewards programme, the cardholders earn award credits for credit card expenditure based on their rewards status (determined by the number of products held). Each award credit is redeemable for either CU1 cashback or CU1 discount on future purchases of goods or services offered by the financial institution (as displayed on its website) or offered by programme partners.5 During the first reporting period, cardholders made purchases with their credit cards and based on their rewards status earned 100 000 award credits. At initial recognition, based on historical data, it is expected that 90% of the award credits granted will be redeemed. This expected redemption rate therefore takes into account the award credits expected to be forfeited, due to cardholders neglecting to exchange award credits before the expiry date (if applicable), cardholders who close their account without exchanging award credits, or deceased cardholders with an award credits balance.
A lack of guidance contained in the IFRS relating to accounting for CCRP transactions results in management being required to apply their judgement in accounting for these transactions. The nature of the CCRP transaction indicates that it forms part of a revenue transaction and there is a relationship with the customer, which indicates that IFRS 15 is applicable. However, the allocation of the transaction price based on relative stand-alone selling prices (as prescribed by IFRS 15) is impractical6 owing to the multiple revenue streams coming from various cardholders and no direct link existing between the multiple revenue streams (that constitute the access fee) and the award credits liability per cardholder. There is a pool of revenue with no direct link to the pool of expenses.
Taking into account that IFRS 15 is a principle-based standard, that the CCRP transaction indicates a revenue transaction, and that the allocation of the transaction price based on relative stand-alone selling prices is impractical, the financial institution concludes that the most appropriate way to account for the CCRP transaction is to recognise a gross revenue of CUs250 000 for the access fees received and a separate reduction in revenue and an IFRS 15 liability for the award credits granted. It can be argued that some of the core principles of IFRS 15 can still be applied to measure the IFRS 15 contract liability. International Financial Reporting Standard 15 (par. 73) states that:
[T]he objective when allocating the transaction price is for an entity to allocate the transaction price to each performance obligation in an amount that depicts the amount of consideration to which the entity expects to be entitled in exchange for transferring the promised goods or services to the customer. (IASB 2014a:A922)
In terms of IFRS 15, the financial institution estimates a stand-alone selling price of CU0.90 (CU1 × 90%) per award credit, totalling CUs90 000 based on the discount the cardholder will receive when redeeming the award credits (value regarded from the cardholder’s perspective) and the likelihood of the award credits being redeemed (i.e. the expected redemption rate) (IFRS 15, par. B42).
At the end of the first reporting period, 50 000 award credits were redeemed for goods or services offered by the financial institution (as displayed on its website) and the financial institution now expects 96 000 award credits to be redeemed in total at the financial institution (96%). The increase in the expected redemption rate (from 90% to 96%) is taken into account when the portion of revenue to be recognised is calculated. The nature of its promise is a performance obligation to provide the specified goods or services itself and the financial institution collects the consideration allocated to the award credits on its own account; therefore acting as the principal in the transaction (applying IFRS 15, par. B34). As the financial institution satisfies the performance obligation, the financial institution recognises revenue as the gross amount of consideration that it expects to be entitled to in exchange for the goods or services transferred (IFRS 15, par. B35). The financial institution is entitled to a breakage amount and recognises the expected breakage amount as revenue in proportion to the pattern of rights exercised by the cardholder (IFRS 15, par. B46).7 The financial institution recognises revenue and derecognises the award credits contract liability of CUs46 875 ([50 000 award credits redeemed ÷ 96 000 expected award credits redeemed] × CUs90 000) in terms of the award credits redeemed.
During the second reporting period, in line with management’s expectation, 46 000 award credits are redeemed (cumulative award credits redeemed are 96 000). The financial institution has already derecognised CUs46 875 of the contract liability; it therefore derecognises the remaining CUs43 125 (CUs90 000 – CUs46 875) as it satisfies the performance obligation. The journal entries accounting for the pool of revenue received by the rewards programme from the cardholders (via the product houses) and the award credits granted in the financial institution’s records applying the principles of IFRS 15 are illustrated in Table 2.
| TABLE 2: General journal entries for the financial institution offering a complex credit card rewards programme and applying the principles of International Financial Reporting Standard 15. |
For both Examples 1 and 2, if award credits are redeemed at the programme partners, then the financial institution collects the consideration allocated to the award credits on behalf of the programme partner and acts as the agent in the transaction (applying IFRS 15, par. B34) (Brink 2024). The agreement with the programme partners determines that consideration is payable to the programme partner when award credits are redeemed, and the benefits are provided by the programme partner. This means that the initial recognition of the CCRP transaction where the financial institution acts as an agent will remain unchanged, because only when award credits are redeemed will the financial institution be able to determine whether it acts as a principal (collecting consideration on its own account) or an agent (collecting consideration on behalf of the programme partner) in the transaction (Brink 2024). The only additional journals required for each reporting period are recognising the amount payable to the programme partners as a contract cost expense, as it is a cost that relates to a partially satisfied performance obligation (IFRS 15, par. 98[c]) as award credits are redeemed at the programme partners (Brink 2024).
Example 3: Credit card rewards programmes offering cash rewards only
Example 3.1: Cash paid directly into a current account: In terms of the rewards programme, the cardholders earn award credits for credit card expenditure. The financial institution pays a direct cashback into the cardholders’ account based on the award credits granted. During the first reporting period, cardholders made purchases with their credit cards and, based on their rewards status, an amount of CUs100 000 was paid into the cardholders’ accounts. The financial institution also earns an interchange fee on each credit card transaction and the total interchange fee received for the first reporting period amounts to CUs600 000.
A lack of guidance contained in the IFRS relating to accounting for CCRP transactions results in management being required to apply their judgement in accounting for these transactions. The nature of the CCRP transaction indicates that it forms part of a revenue transaction and that there is a relationship with the customer, which indicates that IFRS 15 is applicable. However, the liability, namely to provide cash, that arises meets the definition of a financial liability (in terms of IAS 32, par. 11) because a contractual obligation arises to provide cash and IFRS 9 will be applicable. In terms of IFRS 9 (and IFRS 13), the award credits should be measured according to the cash amount payable, which represents the fair value from the cardholder’s perspective (IFRS 13, par. 37), not adjusted for expected redemption rate (IFRS 13, par. 47).
The scope of IFRS 15 specifically excludes financial instruments and other contractual rights and obligations within the scope of IFRS 9 (IFRS 15, par. 5[c]), but par. 7 of IFRS 15 determines that a contract with a customer may be partially within the scope of IFRS 15 and partially within the scope of a standard listed in par. 5, namely IFRS 9. The two parts of the CCRP contract should therefore be separated (IFRS 15, par. 5) and accounted for using the guidelines of both IFRS 15 and IFRS 9. The amount of the contract recognised under IFRS 9 should not be included in the transaction price (IFRS 15, par. 7[a]) and should reduce the revenue recognised.
Revenue will therefore be recognised as an amount net of the financial liability. At the end of the first reporting period, cardholders had withdrawn the CUs100 000 and the financial liability will be derecognised. The journal entries accounting for the interchange fee received and the direct cashback reward in the financial institution’s records applying IFRS 15 and IFRS 9 for the reporting period are illustrated in Table 3.
| TABLE 3: General journal entries for the financial institution accounting for a direct cashback reward. |
Example 3.2: Cash paid into a wallet that requires a transfer by the cardholder to a current account: Assume the same information as in Example 3.1, except that the terms and conditions of the CCRP that offers a direct cashback reward determine that the cashback is first placed in a ‘wallet’ and requires cardholders to transfer the cash to a current account before it can be withdrawn. The cardholder transferred the cash from the ‘wallet’ to a current account during the first reporting period and only withdrew the cash during the second reporting period. The journal entries accounting for the interchange fee received and the direct cashback reward in the financial institution’s records applying IFRS 15 and IFRS 9 for the reporting period are illustrated in Table 4.
| TABLE 4: General journal entries for the financial institution accounting for a direct cashback reward that is first placed in a wallet. |
Conclusion and recommendations
There is currently a gap in the body of accounting knowledge relating to CCRP illustrative examples that provide co-brand CCRPs, complex CCRPs and CCRPs offering cash rewards with guidance and certainty on how to apply the IFRS to CCRP transactions. Given this lack of guidance provided in the IFRS, CCRP management in practice expressed their need for illustrative examples to ensure that CCRPs are faithfully and consistently accounted for in their annual financial statements (Brink 2024). The objective of the research reported in this article was therefore to address this need and to develop illustrative examples of co-brand CCRPs, complex CCRPs and CCRPs offering cash rewards.
For accounting purposes, the general rule is to account for similar transactions in a consistent manner across different entities, but CCRP transactions present an exception to this rule as the structure and functioning of each type of CCRP differ, which results in a unique transaction per type of CCRP. The article indicated the differences in the structure and functioning of each type of CCRP that support the different accounting treatments suggested.
The illustrative examples included specific scenarios, amounts, and journal entries to account for the initial recognition and derecognition of award credits in co-brand CCRPs, complex CCRPs and CCRPs offering cash rewards. The examples also explained and justified the various journal entries and calculations with reference to the relevant standards’ paragraphs. The initial recognition of the award credits liability, the proportionate derecognition of the liability when award credits are redeemed, and a change in the expected redemption rate over time were addressed in the examples.
The co-brand CCRP taking over an award credits liability example illustrated how and why the transaction should be accounted for by applying IFRS 15. The complex CCRP example illustrated that the application of IFRS 15’s allocation of the transaction price based on relative stand-alone selling prices is impractical due to the multiple revenue streams coming from various cardholders and no direct link existing between the multiple revenue streams and the award credits liability per cardholder. By applying the principles of IFRS 15, it was found that the most appropriate way to account for the CCRP transaction is to recognise a gross revenue for the access fees received from the product houses and a separate reduction in revenue and an IFRS 15 liability for the award credits granted. A scenario where the nature of the benefits is a cash reward was illustrated for the first time in an example applying IFRS 9.
The illustrative examples were confirmed by using two rounds of the Delphi technique. The experts employed as panel members consisted of heads of CCRPs, CCRP accountants, and audit partners. The following adjustments were made based on the panel members’ comments: Example 3.1 was adjusted to account for the transaction applying IFRS 15 and IFRS 9. Example 3.2 was added based on a participant’s comment that some CCRPs that offer a direct cashback reward first place the cashback in a ‘wallet’. Reference to award credits that are forfeited and other minor clarifications were included in the examples.
The accounting treatment of a co-brand CCRP (that views the transaction as part of an integrated revenue transaction) and a complex CCRP differs from a simple CCRP (that views the transaction as part of an integrated revenue transaction), even though IFRS 15 is applied to all three mentioned CCRPs. In co-brand CCRP transactions, the retailer initially recognises the contract liability for the prepayment received at the value of the consideration received for taking over the award credits liability (transaction price). A complex CCRP applies the principles of IFRS 15 and recognises a gross revenue and a separate reduction in revenue and an IFRS 15 liability. A simple CCRP applies the deferred revenue model of IFRS 15 and allocates the transaction price between the relevant revenue stream and the award credits granted. The accounting treatment of CCRPs that offer cash rewards applying IFRS 15 and IFRS 9 also differs from CCRPs offering a redemption choice between goods or services and cash (a non-cash reward) applying either IAS 37 (when the transaction is viewed as a marketing tool) or IFRS 15 (when the transaction is viewed as part of an integrated revenue transaction).
Given the lack of guidance provided by the IFRS, an opportunity was identified to develop illustrative examples of different types of CCRPs to bridge the gap between theory and practice. By addressing the gap in the current body of knowledge, the management of co-brand CCRPs, complex CCRPs and CCRPs offering cash rewards now have illustrative examples to assist them in their decision-making process on accounting for these unique transactions. Although rigorous reflective practices were employed to minimise researcher bias, it is important to acknowledge the potential impact of the researchers’ experiences, perspectives, and assumptions on the collection and interpretation of the data.
This study is important because it responds to a call by the IASB on academics to do post-implementation research (IFRS 2021) to inform and contribute to the post implementation review process (IFRS 2024). Moreover, the additional guidance provided by this study will ensure relevant and faithful representation of the underlying transaction, aligning with the fundamental qualitative characteristics. It will also ensure that information is comparable across entities, enhancing the qualitative characteristic of comparability. This results in useful financial information, addressing the objective of general-purpose financial reporting, which is foundational to the IASB’s Conceptual Framework for Financial Reporting (IASB 2018). The illustrative examples can also assist auditors, making it easier to verify (audit) CCRP transactions. In the context of academe, the study is important because it shows educators that it is crucial to train students to apply principle-based standards to complex transactions, properly preparing them for the workplace. Students should be able to read and apply any standard to a transaction, with the lifelong learning skills developed at university. Specifically, with regard to IFRS 15, discussion questions that require critical thinking can aid in developing these skills.
Acknowledgements
Competing interests
The author declares that they have no financial or personal relationship wthat may have inappropriately influenced them in writing this article.
Authors’ contributions
S.M.B. is the sole author of this research article.
Funding information
This research received no specific grant from any funding agency in the public, commercial, or not-for-profit sectors.
Data availability
The author confirms that the data supporting the findings of this study are available within the article.
Disclaimer
The views and opinions expressed in this article are those of the author and are the product of professional research. The article does not necessarily reflect the official policy or position of any affiliated institution, funder, agency or that of the publisher. The author is responsible for this article’s results, findings and content.
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Appendix 1
The following figures illustrate the structure and functioning of different credit card rewards programme (CCRPs).
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FIGURE 4-A1: Credit card rewards programme offering a direct cash back. |
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Footnotes
1. This study used a prescriptive (normative) accounting theory (Schroeder et al. 2011) to develop the illustrative examples.
2. These reports are characterised by the inclusion of illustrative examples.
3. Non-cash rewards can be defined as award credits redeemable for goods or services and for cash, for accounting purposes (Brink & Steenkamp 2023).
4. Triangulation refers to ‘the combination of methodologies in the study of the same phenomenon’ (Denzin 1970:291).
5. For the purposes of this example, the award credits are regarded as a non-cash reward (Brink et al. 2023).
6. If allocating the transaction price based on relative stand-alone selling prices is not regarded as impractical, IFRS 15 (par. B42) can be applied to determine the relative stand-alone selling price and allocate the transaction price accordingly.
7. This accounting treatment is also supported by Illustrative Example 52 of IFRS 15. Specifically refer to IE270, where a change in the expected redemption rate occurs and the change is accounted for when derecognising the award credits liability.
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