While most marketers talk about customer loyalty, the principles behind accounting for loyalty remain unclear. While customer loyalty is achieved over the long term, the sale & reward of points is treated as short term and have to be accounted for within the same financial year!
DNA Money in India had an interesting article from Rajiv Goyal( E&Y) on the lack of clarity in accounting loyalty earnings & expenditure.
Rajiv argues that according to ICAI( Institute of Chartered Accountants India):
- Accounting Standard 9 (AS-9) on Revenue Recognition does not specifically deal with accounting of discounts offered on sales. It only states that these should be deducted from the total sales. The generally accepted fundamental accounting assumption on the accrual concept of accounting holds that all costs should be recognised as incurred.
- The principle of prudence as per Accounting Standard 1 (AS-1) Disclosure of Accounting Policies requires that provision should be made for all known liabilities and losses on an estimated basis. Going by the concepts provided in AS-1, retailers would need to provide for the liability based upon estimates.
- However, there are some factors that may impair a retailer’s ability to make a reasonable estimate. These include- relatively long periods in which a particular rebate or refund may be claimed The absence of historical experience with similar types of sales incentive programmes or the inability to apply such experience because of changing circumstances.The absence of a large volume of relatively homogeneous transactions.
- There is no specific guidance in the Indian Accounting Standards on accounting for reward points or loyalty programmes. However, in the opinion of the expert advisory committee of the ICAI, in such a case, the seller should create a provision for the liability at an amount equivalent to the cost expected to be incurred on redemption of the outstanding reward points at any time in future by applying actuarial method.
As more and more companies go in for such programs, the need to come to a fair consensus on how to treat the reward of points( which is really a discount) is important as it has huge impact on investing marketing resources behind these programs.
The accounting principles behind these programs need to get a lot more customer-centric.