Accounting treatment of reward-points under credit card reward point schemes
The fact of the case-
A bank, providing credit card services, had introduced a reward point scheme, which could be subsequently exchanged for acquiring various items in the rewards catalog.
To cover the cost of redemption, the bank made a provision based on the reward points outstanding as of the year-end & the expected redemption rate based on actuarial trends analysis.
The bank, on a conservative basis, made a provision significantly higher than the observed redemption rate (i.e.,10%) of such points outstanding, to fully cover the cost of redemption. However the auditor asked for the provision on all the reward points outstanding at the year-end.
Bank Opinion
The cost of redemption of the reward points was an obligation for the bank & had to evaluate the possibilities of redemption in the future based on available information (i.e., the estimated redemption rate).
For the uncertainty in determining the total reward points to be redeemed in a year, the bank thought that based on AS 4, it would be required to provide the total cost of reward points that were expected to be redeemed during the year, based on estimation as per an actuarial trend analysis & the methodology and the basis of provisioning would be disclosed by way of a note in the financial statements.
The bank was of the view that the amount expected to be incurred for the redemption of reward points could be considered as a provision and any amount provided in the books over and above this provision should be considered as a reserve at the year-end.
Also given AS 4 and the fact that the bank was disclosing methodology in its financial statements by way of a note, whether the bank would be required to disclose the balance reward points outstanding as of the year-end as a contingent liability & if yes, then whether any provision was required to be made by the bank in respect of the same.
EAC Opinion-
A ‘liability’ is a present obligation relating to the past events. The bank’s obligation towards reward points arose as soon as a customer became entitled to the reward points & provision for the liability for reward points outstanding expected to be redeemed in the future might be estimated, at the year-end, by applying the actuarial method. The bank was justified in providing for an amount equivalent to the cost of the reward points expected to be redeemed in the future provided the amount of provision was estimated as discussed above.
If the amount provided for reward points expected to be redeemed had been estimated as above, any additional disclosure by way of a note was not necessary. However, disclosures regarding the bases for arriving at the amount of the estimate might be made for more meaningful financial information. In case the amount provided was less than that required, any disclosure to this effect in the financial statements would not rectify the short provision made by the company.
The EAC was of the view that the provision for liability for reward points should be at the amount estimated. If the excess provision was made for liability outstanding at the year-end, the excess should be considered as a reserve and not as a provision.
The EAC further noted that the liability for reward points outstanding at the year-end was certain; uncertainty existed, if any, only about the amount which should be estimated. The EAC was, therefore, of the view that the bank was not required to disclose the balance reward points outstanding at the year-end as a contingent liability & no provision was required to be made by the bank in respect of the same.
