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Question 2: Are cardholder rewards programs subject to Topic 606?
Publication date: 31 Jan 2020
us FASB Staff Q&A Revenue 2
Reference(s): Section 606-10-15
The 2011 Exposure Draft (ED), Revenue Recognition (Topic 605): Revenue from Contracts with Customers, included an example of a customer loyalty program that was within the scope of Topic 606 and provided a material right to the customer resulting in a separate performance obligation for the loyalty points (Example 22 in 2011 ED). In response to the 2011 ED, some preparers in the financial services industry requested clarification about the application of the proposal to credit card rewards programs. Specifically, those respondents were uncertain whether the Board intended the revenue model to be applied to credit card rewards models.
The Board deliberated whether to provide explicit guidance on this issue (in situations in which the rewards program is deemed not to be within the scope of another topic, such as Topic 310). The Board decided that entities should follow the guidance in the model to determine instances when customer loyalty rewards programs are or are not performance obligations and did not specify whether credit card rewards programs are in or out of the scope of Topic 606. This decision is outlined in the basis for conclusions of Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606), specifically, paragraph BC388.
It is important to note that Example 52 in Topic 606 (paragraph 606-10-55-353) does not address the scope question being asked. Rather, it addresses the accounting for a contract already deemed to be within the scope of Topic 606. The staff notes that there are differences between the credit card arrangements and the fact pattern included in Example 52. Additionally, the example is addressing a specific fact pattern rather than illustrating the general accounting for all reward programs.
The staff highlights that there are several items to consider in answering this question. Because the outcomes would be facts and circumstances specific, there is no single answer as to whether credit card rewards programs broadly are included in or excluded from the scope of Topic 606. Rather, the staff has outlined parts of Topic 606 that entities should consider when concluding in their specific scenarios.
The scope section of Topic 606 provides guidance on how to account for contracts when the contract includes both a financial instrument component and another component included within the scope of Topic 606. For example, if an entity concludes that the entire arrangement consideration is within the scope of Topic 310 (that is, because the recognition of the credit card fees related to the rewards program are within the scope of that Topic) then the rewards program would not be within the scope of Topic 606. However, if the entity were to conclude the contract included a component within the scope of Topic 606, the following are some items an entity should consider when determining the appropriate accounting for the reward program.
(a) Step 1 of the revenue model requires an entity to identify the customer in the contract. The entity would need to determine who its customer(s) is (are) in the arrangement (for example, the entity’s customer may be the merchant paying interchange fees, rather than the cardholder, or both).
(b) Step 1 of the revenue model provides guidance about when to combine two or more contracts with the same customer and account for them as a single contract. If the contracts are not with the same customer (for example, where there is a contract with the cardholder and a separate contract with the merchant, which are not related parties), the entity would not need to combine the contracts.
(c) Step 2 of the revenue model provides guidance for identifying performance obligations (including material rights). If an entity concluded that a contract is within the scope of Topic 606 and that the cardholder is a customer, then the entity would assess whether goods and services provided under the rewards program are distinct goods or services. It is important to note that just because the cardholder is determined to be a customer, does not mean it is the card issuer’s only customer (that is, the card issuer may conclude that its customers are the cardholders and the merchants).
Copyright #year# by Financial Accounting Foundation, Norwalk, Connecticut.
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