The customer loyalty card scheme in the case inquestion
The proceedings before the BFH that were brought byPKF (case reference: IV R 20/19) concerned a retail company’s highly developed customer loyalty card schemethat, beyond the specific case, is exemplary of many othercomparable schemes. The scheme is applied as follows –customers join the loyalty scheme in writing and for eachpurchase the customer’s card is individually credited with3% or 5% of the value of their purchase in the form ofbonus points. The credited bonus points can then be offset against the price of subsequent purchases made bythe customer and used as a means of payment with noupper limit; for example, this also means that it is possibleto pay solely with the loyalty card using the bonus pointsthat were previously collected. The bonus points that havebeen collected cannot however be paid out in cash.
Criteria for the creation of provisions and ...
In the statement of justification, the BFH initially focusedon the criteria for the creation of provisions because,in principle, the liabilities are still of uncertain timing oramount on the balance sheet date. Admittedly, an obligation does indeed already exist for the company to acceptthe collected bonus points as a means of payment fora future purchase of goods. However, the actual specific obligation to offset bonus points against the price isbased precisely on the assumption that there will first bea future purchase. For accounting purposes, a liability inthe legal sense has therefore not yet arisen.
Generally speaking, provisions for liabilities of uncertaintiming or amount have to be recognised if solely theamount of the liability is uncertain or if, in principle, theliability is indeed (possibly also) uncertain but it is, nevertheless, reasonably probable that the liability will arise inthe future and its economic cause arose before the balance sheet date. Furthermore, the debtor has to be ableto seriously expect that it will be taken up.
... their use in the case in question
The case that was ruled on concerned such a liabilitythat was, in principle, of uncertain timing or amount. Thekey question concerned the point at which the economiccause of the liability arises. Specifically, did the economiccause arise
- before the balance sheet date with the goods transaction for which the bonus points will be credited, or
- after the balance sheet date with the goods transaction for which the bonus points will be redeemed.
According to the established case law of the BFH, thepresence of an economic cause of a liability in the preceding fiscal year would assume that the economically material defining criteria had been met and the situation wherethat liability would arise in the future depended solely oneconomically immaterial defining criteria. Therefore, thelegal and economic points of reference for the liability ultimately have to lie in the past.
In keeping with PKF’s view – and thus contrary to the opinion of the local tax office and also that of the Federal Ministry of Finance that intervened in the case -, the BFH nowargues that, for similar developed bonus points systems orcustomer loyalty card schemes, the economic cause will liein the past; this is thus a differentiation in terms of BHF caselaw. The purchase transaction for which bonus points aregranted is not just the reason for granting bonus points assuch, but also the criterion for the number of bonus pointsthat have to be credited. The entitlement of the holder ofa customer loyalty card to a future price deduction thusdepends, in terms of the reason and the amount, on apurchase transaction for which bonus points are granted.By contrast, the BFH regards the future redemption transaction, where the previously earned bonus points are offset, as being an economically immaterial defining criterionbecause the loyalty cardholder’s benefit neither gives riseto the transaction nor influences its amount.
Please note: The additional requirements for the creationof a provision, namely, the probability of the liability arising and the serious expectation that it will be taken up,were clearly present as could be demonstrated throughthe everyday practice of such a bonus point system orloyalty card scheme and were thus also not relevant to theissue in this case.
Recognition of a provision ...
Whenever a customer earns offsetable credit via a customer loyalty programme
- that arises via a transaction before the balance sheetdate and
- the amount of which is likewise fully determined as aEuro value from this transaction and
- that can be unconditionally used as a means of payment to offset the purchase price in future customertransactions after the balance sheet date,in the future, the recognition of a provision for liabilitiesof uncertain timing or amount in the financial and taxaccounts will be mandatory. Merely a percentage discount off a future transaction after the balance sheet datewould not be sufficient because, in that case, the size ofthe future transaction would determine the amount of thebenefit as a Euro value for the customer.
... with a broad impact
Consequently, it is not only all highly developed bonuspoint systems or customer loyalty card schemes, comparable with the one in the case that was ruled on, that willfall under the provision requirement but, according to theview expressed here, a large number of simple customerloyalty card schemes that basically have the same business model will also be affected.
Please note: This could possibly apply to commonplace‘stamp’ or ‘sticker’ cards that are issued, for example, bybakeries, car wash facilities, espresso bars, or chemists.Here, a stamp or sticker is typically added to a customercard for each transaction, although the number of stampsor stickers depends on the amount of that transactionvalue. Once the card has been completely filled, the customer gets a loaf of bread, an espresso or a car washfree of charge, or a specific accumulated Euro amountis deducted, as a quasi means of payment, from a futurepurchase – this is frequently the case with chemists.
Even in the case of these simple systems, it is solely theoriginal purchase transaction that determines the amountof credit to which the customer will be entitled. The factthat no written agreement is concluded here would notbe a sufficient reason to differentiate this from the casethat was ruled on because agreements can also be concluded verbally and there would, at least, be a de factoobligation to offset or redeem the credit on the loyaltycard issued by the company.
Measurement issues
In all cases, the provision must not be recognised atthe full Euro value amount of all the issued bonus pointsor customer cards with credits, but instead only at theamount of the full costs that will arise in relation to futureredemption because the issuing company will only incurthe latter amount. Economically speaking, this wouldbe an obligation to supply goods as cash payments areexcluded.
Please note: Furthermore, the probability of redemption has to be taken into account, i.e. an additionalamount should be deducted to cover the bonus pointsor customer cards with credits that are likely not to beredeemed.
