Customer Retention Tools to Improve Profitabilit - Literature review Example

AASB Interpretation 13- Customer Loyalty Programmes Name Institution Course Date AASB Interpretation 13- Customer Loyalty Programmes Introduction Customer loyalty programmes are utilized by companies to offer clients with incentives to purchase their services or goods. If a client purchases services or goods, the company provides the client award credits. The client may redeem these award credits for rewards like discounted or free services or goods. Companies that conform to AASB interpretation 13 will concurrently be in conformity with IFRIC Interpretation 13. IFRIC 13 addresses how entities that provide their clients loyalty award credits account for their obligation to offer discounted or free services or goods when and if the clients redeem points. Background of the IFRIC interpretation 13 IFRIC Interpretation 13 explains that customer loyalty programmes are compound element arrangements, whereby the consideration attained from the sale of services or goods is allocated amid the services or goods delivered and the award credits that will be redeemed in future. The consideration must be allotted to the services or goods originally offered and to the award credits, based upon their fair value. For arrangements that fall under the interpretation scope, IFRC 13 clearly forbids the unconventional treatment of distinguishing the entire consideration obtained as income, with a different liability for cost of supplying the rewards (Christian & Ludenbach, 2013). Fair value is the amount of money that the award points could be traded for on the standalone basis. The allocated consideration to the award credits must be displayed on a balance sheet as deferred revenue and must be discharged to income statement when award credits expire or are redeemed (Kirk, 2009). IFRIC interpretation 13 applies to particular incentives earned in connection with sales, but not to incentives offered to originally generate a sale (such as free coupons offered upon entry to a shop for discounts upon goods bought that day, which are merely accounted for as revenue upon utilization of the coupon) (Zack, 2009). According to Epstein and Jermakowicz (2008) the IFRIC 13 customer loyalty programmes is valid to yearly periods starting after or on July 1 2008.Entities utilize customer loyalty programmes to offer their clients with incentives to purchase their services or goods. When a client purchases services or goods, the entity provides the client with award credits or points. The client consequently redeems these points for rewards like discounted or free services or goods. IFRIC interpretation 13 deals with the accounting by an entity that offers award points. It is applicable to consumer loyalty award points that entities offer to their clients as a portion of the IAS 18 sales transaction and the clients can redeem in the future for discounted or free services or goods (Everingham, & Kana, 2008). Customer loyalty programmes are operational in different ways. Firstly, consumers must attain a minimum value or number of points prior to redeeming them. Secondly, the consumer might earn award credits on a sole purchase of services or goods or on the renewal of a contract over a certain period. Thirdly, the programme may be operated by the entity itself or by a third party (Mackenzie et al, 2011). Deferred Revenue Deferred revenue characterizes a liability for finances obtained by a company for which it has a responsibility to offer future services or goods. IFRIC 13 necessitates that income be deferred when the consideration offered to a client in association with a loyalty programme warrants the client to a discount on a purchase in the future. The consideration is usually allocated amongst the diverse constituents of an arrangement utilizing fair values. Liability for deferred revenues must be recorded on the basis of the fair value of award credits. IFRIC 13 doesn’t mandate a particular scheme of the determination of fair values of the incentives, but it asserts that the quantity must be based upon the fair value to award credits holder, not the price of ward credits redemption to the issuer. Regularly, a reasonable approximate of fair values is based upon the discount that the clients will be given upon the redemption of the award credits. , Nevertheless, IFRIC interpretation 13 also concedes that in several instances, not all points will be redeemed by the clients. Consequently, deferral of revenue must as well be based upon the fraction of the incentives that are anticipated to be redeemed (Zack, 2009) The IFRIC Interpretation 13 recognized two probable approaches to deferral of revenue through dealing with paragraphs thirteen and nineteen of IAS 18 Revenues. Application of paragraph thirteen would result to allocation of some of the received consideration or the receivable from sales transaction to the reward credits suspending the identification of revenue. Application of paragraph nineteen would lead in the provision of the approximated future costs of giving the awards or recognition of a liability. The IFRC conclusion was that IAS 18 paragraph thirteen was the most suitable approach and concurred that some of the received consideration in regard of the original sale must be allotted to award credits and be identified as deferred income until an entity meets its responsibility of delivering the awards to the clients. The quantity of the deferred revenues would be gauged through reference to fair value of award credits to a customer and not their cost to an entity and identified as a allotment of income (PricewaterhouseCoopers LLP, 2011). Ernst and Young (2013) note that according to IFRIC I 13, the award credits offered to a client due to the sales transaction are a differently recognizable component of a transaction itself and it represents the rights offered to the client for which the client implicitly paid. Also, the IFRC Interpretation 13 notes that loyalty rewards aren’t delivered to a client at a similar duration as other services or goods and it’s thus essential to separate the original sale into elements and apply the identifications criterion separately to every element so as to reflect the transaction essence. In addition, the award credits might be differentiated from the marketing expenditures since they are offered to the client as a fundamental portion of sales transaction (Mirza et al, 2011). Marketing expense approach versus deferred revenue approach As customer loyalty programs and their accounting treatment vary. Generally, there are two major approaches that have been developed in practice: the deferred revenue model and the marketing expenditure model. In the marketing expenditure model, the price of supplying services or goods in the future connected to the customer loyalty points is identified as an expenditure at the period of selling the service or goods, while in the deferred revenue approach, the points are treated as a different element of the sales deal that needs delivery in future. In order to deal with this variance and to improve comparability and consistency, the IFRIC issued Interpretation 13; consumer loyalty programmes (Mackenzie et al, 2011). The IFRIC 13 mandates companies to use the deferred revenue approach which involves the selection of the received consideration or receivable from the consumers for the original sale amid the award credit and the other elements of the services or goods sold. The quantity allotted to the award points is deferred and identified as income solely upon usage or redemption, expiration, or at times, when the company amends its anticipations on the amount of award credits anticipated for redemption. Another requirement of the IFRIC Interpretation 13 is that the award credit should be gauged at fair value or the amount for which the points could be traded separately (Zack, 2009). IFRIC Interpretation 13 and accounting of award credits The IFRIC Interpretation 13 requires companies to account for the award credits or points as a separately recognizable element of sales transaction under which they are offered. The fair value receivable or consideration receive is allotted amid award points and other elements of the trading. The consideration assigned to the points is gauged through reference to faire value of the points. If the company supplies the award credits itself, it identifies the consideration allotted to the award points as income when the points are redeemed and the company executes its responsibility to offer the awards. The quantity of the income identified is based upon the amount of points that a customers have redeemed for provision of rewards, relative to the entire number anticipated to be redeemed. When a third party is the supplier of the awards, the company is needed to make an assessment on whether it is gathering the consideration allotted the reward points on its individual financial record or on behalf of third party. This implies that the company should assess if it is operating as the principal in a transaction or if it is operating as an agent for third party (Ankarath et al, 2010). When the company is gathering consideration for the third party, it calculates its income as the net quantity saved on its individual account or the difference amid the consideration allotted to the points and the quantity payable to third party for offering awards. This is because a third party firms may offer a service of redemption of points against a wide range of services or goods. For instance, credit card programs warranting card holders to redeem award credits for services or goods from particular third party retailers. It also identifies net amount as income when third party is obligated to offer rewards and warranted to get consideration for action. On the other hand, if a customer selects to claim rewards from the third party or the company, these events might take place solely when the consumer selects to claim rewards from third party. If a company collects consideration on its individual account, it calculates its income as gross consideration allotted to award points and identifies the income when it accomplishes its duty in respect of rewards (Alexander & Archer, 2011). Benefits of customer loyalty programs Customer loyalty programmes are an efficient way of improving customer retention in an organization. The high cost of attracting new clients in comparison with retention of already existing clients can help a company to significantly improve bottom line profits. Haddad (2011) notes that in the modern day competitive market place, consumers find it simple to move from one supplier to another. However, loyalty programs are an effective scheme to raise consumer retention and boost profitability. Building a devoted clientele is not only concerned with keeping clients satisfied. The reality that clients are satisfied does not deter them from moving to a competitor who provides them with extra goods or services. To boost customer loyalty, an organization is required to identify and reward its best clients. A loyalty program can be utilized to delight and incentivize the most valued clients. Loyalty schemes permits an organization to focus upon its best clients and boost satisfaction levels of customers. Loyal clients purchase more and have a likelihood of paying more, which increases an organization’s cash flow and profitability. Loyal clients can also be advocates of a business. They recommend a business to other people saving an organization’s marketing costs (Haddad, 2011). Setbacks of customer loyalty programmes Customer loyalty programmes are a cost effective scheme of marketing for several companies. Nevertheless, since several companies have been compelled into providing a customer loyalty program as a scheme of competitiveness. According to Dowling and Uncle (2010) several companies adopt customer loyalty programs too swiftly, without prior research. For instance, in the airline sector, when competitors provide the same rewards, there is usually minimal sustainable advantage. This is because customer loyalty schemes are very simple to copy. Additionally, loyalty schemes are costly to set up, and in addition to the initial collection of data, these schemes take a long period to generate returns. For example Shell Company spent around forty million pounds to develop its smart card scheme (Dignam, 2008 ) Therefore, given these considerable costs , loyalty programs must be viewed in terms of long term tactical investments other than short term strategic maneuvers to counteract competition. Companies have established customer loyalty programs since they have endorsed the economies of consumer retention. This implies that managers have recognized that loyal clients are highly profitable, less costly to serve and advertise a business to other people (Dignam, 2008). Conclusion IFRIC13 Customer Loyalty Programmers deals with accounting by the companies that offer award credits. It requires companies to account for award credits offered in the context of a client loyalty programme as an independently identifiable element of sales transaction in which they are offered. The fair value of the consideration receivable or received is allocated amid award credits and other elements of sale. Customer loyalty programs are useful customer retention tools and can help an organization to improve profitability. However, they are costly to establish and thus companies should use them as long term tactical investment List of References Everingham, G, & Kana, S, 2008, Corporate Reporting: 8th Edition, Routledge, London. Christian, D, & Ludenbach, N, 2013, IFRS Essentials, Wiley Publishers, New York. Epstein, B, & Jermakowicz, E, 2010, WILEY interpretation and application for International accounting and reporting standards, Wiley Publishers, New York. Mirza, A, Holt, G, & Knorr, L, 2011, Wiley IFRS: Practical Implementation Guide and workbook, Wiley Publishers, New York. Kirk, R, 2009, IFRS: A quick reference guide, Routledge, London. Ankarath, N, Mehta, K, & Ghosh, T, 2010, Understanding IFRS Fundamentals: International Financial Reporting Standards, Oxford University Press, Oxford. Ernst & Young, 2013, International GAAP 2013: generally Accepted Accounting Principles under International Financial Reporting Standards, Wiley Publishers, New York. Epstein, B, & Jermakowicz, E, 2008, Wiley IFRS 2008: Interpretation and Application of International Financial Reporting Standards 2008, Wiley Publishers, New York. Zack, G, 2009, Fair Value Accounting Fraud. New Global Risks and Detection Techniques, Wiley Publishers, New York. PRICEwaterhouseCoopers LLP, 2011, IFRS manual of accounting 2009: Global guide to International financial reporting standards, Northwestern University Press, Chicago. Alexander, D, & Archer, S, 2011, International Accounting/ Financial Reporting Standards Guide 2009, Wiley, New York. Mackenzie, B, Coetsee, D, & Njikizana, T, 2011, Wiley Interpretation and Application of International Financial Reporting Standards, Wiley Publishers, New York. Haddad, A, 2011, Using smart cards to gain market share, Gower Publishing Ltd, London. Dowling, R, & Uncles, M, 2010, Do customer loyal programmes really work? Sloan management review, 71-82. Dignam, C, 2008, Being smart is not only redeeming feature, Marketing Direct 1, 51-56. Read More