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Revenue recognition — Credit card reward programs (Education session)

Date recorded:

The Staff considered feedback on the Exposure Draft (issued in November 2011) regarding how the revenue recognition model would apply to credit card reward programs, in particular, when there are more than two parties to the arrangement. The difficulty seems to arise in situations when certain merchants paid a fee to a bank when a payment was done with a credit card. At the same time the bank grants award credits to the cardholder who has used the card. Some respondents (primarily US GAAP reporters) were uncertain whether the revenue model applied credit card reward programs based on Example 24 (that deals with a retailer) in the 2011 ED as it was not clear who the bank’s customer in the reward programs was (i.e. a cardholder or a merchant).

The Staff believed that there were two alternatives for the Board to address the issue:

  1. Alternative A: Provide specific guidance to address the issue.
  2. Alternative B: Rely on the application of the revenue model.

The Staff recommended Alternative B. However, the Staff believed that Example 24 needed an amendment. For some respondents, the Example in the 2011 ED implied that award credits always gave rise to a performance obligation and, therefore, that award credits in a credit card award program always gave rise to performance obligations. As a result, the Staff proposed to clarify that not all customer loyalty arrangements give rise to a performance obligation. In particular, when there are more than two parties to the arrangement, the entity should consider all the facts and circumstances in order to determine a customer in the arrangement that gives rise to the award credits. In other words, whether the award credits were granted to the cardholder for using the card or whether the award credits were, in substance, granted to the merchant for being part of the credit card’s network.

A Board member asked the Staff for confirmation on whether the new revenue recognition standard provided sufficient general guidance for the card issuer to use in respect of performance obligations and agent versus principal relationship. The Staff believed that there was sufficient guidance in the standard.

Another Board member said that people should work through the model and adding more specific guidance on a particular issue would not be helpful. There were many issues that could potentially be discussed in depth. Other Board members supported this opinion.

The Board decided to proceed with Alternative B and to amend Example 24 as recommended by the Staff.

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