National Accounting Standards Board of the NOFA Foundation has submitted comments on the IFRIC Draft Interpretation D20 Customer Loyalty Programmes to International Accounting Standards Board. National Accounting Standards Board of the NOFA Foundation has submitted comments on the IFRIC Draft Interpretation D20 Customer Loyalty Programmes to International Accounting Standards Board. D20 Comment Letters International Accounting Standard Board 30 Cannon Street London EC4M 6XH United Kingdom Re: IFRIC Draft Interpretation D20 Customer Loyalty Programmes Dear Sir/Madame, National Accounting Standards Board of Russia (NASB) appreciates the opportunity to submit comments on the IFRIC Draft Interpretation D20 Customer Loyalty Programmes (hereinafter “the Paper”) and would like to express its support to the activities of the IFRIC aimed at eliminating the cases of potential incomparability in the financial statements of companies applying IFRS. The NASB members have considered the Paper and would like to state their disagreement with the approach selected as suitable in the Paper. We believe that the alternative approach requiring an entity to recognize and measure its obligation to provide free or discounted goods or services by providing for the estimated future costs of supplying the goods or services, is more appropriate for the purposes of customer loyalty programs representation in the financial statements. We support arguments stated in paragraphs BC4 (a) and BC 4 (b). Indeed, customer loyalty programmes are marketing tools designed to enhance sales volumes and thus awards redeemed by customers should be treated in the same way as free samples or gifts presented to customers during the marketing or promotion campaigns. Consequently any costs related to the awarded goods or services are marketing expenses that company incurs in the period when it grants the customer award credits but actually spends in future. Therefore paragraph 19 of IAS 18 should be applied and the obligation should be recognized as an expense at the time of the initial sale and measured by reference to the amount required to settle it, in accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets. We also agree that the value of awards is normally insignificant in comparison with the purchases required to earn them. And therefore the obligation to exchange award credits for awards usually is not a significant element of the sales transaction. Moreover, it may be noted that amount received or receivable in relation to award credits granted should not be treated as advance received and hence should not be recognized as deferred revenue. In the case of advances received, an entity might be required to pay back a significant portion of the amount received before the goods are delivered, and therefore advances are recognized as liabilities in the balance sheet. In contrast, in the case of a sale with award credits granted, the customer can not require from the entity to repay any portion of the amount already paid, but only can receive the awards earned. Thus, the entity has a liability only to the extent of the cost of goods or services for which award credits should be redeemed. In addition, in our view the allocation of fair value of the consideration received or receivable in respect of the ‘initial sale’ between the components discussed by reference to their relative fair values is of little value, whereas the cost of such procedure would be high. In assessing the entity’s financial position the users are more interested to know how much resources will be required from the entity to settle the obligation to submit awards assumed in the ‘initial sale’ than to find in the financial statements ‘artificial obligation’ such as deferred revenue calculated in many cases on the basis of an arbitrary decision. Therefore we came to the opinion that establishing a provision for estimating future costs of supplying the goods or services, i.e. applying paragraph 19 of IAS 18, is a more appropriate approach from the point of view of cost-benefit and faithful representation criteria. Yours sincerely, Mikhail Kiselev Chairman National Accounting Standards Board