Assurance Gazette – February 2024 Edition

The Assurance Gazette of February 2024 explores Ind AS 32, focusing on the accounting of convertible equity instruments. Companies must assess and classify these instruments accurately, reflecting their correct classification of debt and equity, ensuring transparency in financial reporting for stakeholders. The Gazette further provides a legitimate evaluation of the accounting aspects related to customer loyalty programmes, offering detailed insights into the deferred revenue and provision model. Customer loyalty programmes has been increasingly gaining popularity across e-commerce companies and other retail industries. Companies come up with innovative customer retention programmes in form of reward and loyalty points. Understanding accounting and valuation of such reward and loyalty points becomes crucial for companies, investors and the auditors considering its significant impact in the financial statements. 

Accounting for Customer Loyalty Programmes: 

Introduction: 

Customer loyalty programs are marketing strategies designed to encourage customers and aims to foster a sense of loyalty among customers by providing them with rewards, incentives, and special offers. The goal is to retain existing customers, increase their lifetime value, and ultimately drive business growth. Customer loyalty points are a popular practice adopted by airlines, credit cards, telecom operators, retailers, hotels, fuel outlets, e-commerce companies.  

There are various type of schemes or incentive programmes which are given below:  

• Award that entitles the holder to discounted/free goods or services in the same website/mobile application. (Air miles issued by airlines/fuel stations). 
• Award that the holder can use in stores within the same website/ mobile application or chain of website/ mobile application. (Ex Credit card points). 
• Award of points in a programme administered by a third party. • Entity transfers the obligation of redeeming awards to a third party in its entirely.

Under IGAAP framework, the accounting of such customer loyalty programmes of different complex arrangements has not directly been dealt with however the accounting of sale of goods and services under loyalty programmes is refined with issuance of INDAS. Accordingly, to bring parity, accounting of loyalty programmes is covered in “Guidance note on Accounting by E-commerce entities” for entities under I-GAAP framework.