Tuesday, March 24, 2009

Unlucky 13

The number of Customer Loyalty Programmes has blossomed these last few years, but their accounting treatment has not kept pace.

SAA Voyager's programme, for example, according to recent reports, envisages that only seats which cannot be sold will be allocated as awards to qualifying members. Promising rewards is easy, but ask anyone who has tried to obtain one, and the picture changes somewhat.

Until recently, accountants have not known how to budget for these 'contingent' liabilities. A body with the impressive title of The International Financial Reporting Interpretation Committee (whew!) or IFRIC for short has recently issued guidelines in the form of note 13. Basically, this new accounting standard requires that all future liabilities relating to customer loyalty programmes must be estimated and disclosed on the firm's balance sheet.

Although there are no immediate cashflow implications for such firms, the imposition of IFRIC 13 does make their net asset value (ie assets less liabilities) smaller, making it more difficult for them to borrow from banks or to sell shares in their companies to prospective purchasers.

Accounting for these 'contingent' liabilities already occurs in respect of post retirement medical aid contributions by a firm, and will make for more transparency and consumer protection. It might also encourage some airlines to make more seats available as rewards for their loyal customers !

Clive Hill
Financial Services Manager


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