Provisions for bonus points – New recognition requirement for many businesses

The customer loyalty card scheme in the case in question

The proceedings before the BFH that were brought by PKF (case reference: IV R 20/19) concerned a retail company’s highly developed customer loyalty card scheme that, beyond the specific case, is exemplary of many other comparable schemes. The scheme is applied as follows – customers join the loyalty scheme in writing and for each purchase the customer’s card is individually credited with 3% or 5% of the value of their purchase in the form of bonus points. The credited bonus points can then be offset against the price of subsequent purchases made by the customer and used as a means of payment with no upper limit; for example, this also means that it is possible to pay solely with the loyalty card using the bonus points that were previously collected. The bonus points that have been collected cannot however be paid out in cash.

Criteria for the creation of provisions and ...

In the statement of justification, the BFH initially focused on the criteria for the creation of provisions because, in principle, the liabilities are still of uncertain timing or amount on the balance sheet date. Admittedly, an obligation does indeed already exist for the company to accept the collected bonus points as a means of payment for a future purchase of goods. However, the actual specific obligation to offset bonus points against the price is based precisely on the assumption that there will first be a future purchase. For accounting purposes, a liability in the legal sense has therefore not yet arisen.

Generally speaking, provisions for liabilities of uncertain timing or amount have to be recognised if solely the amount of the liability is uncertain or if, in principle, the liability is indeed (possibly also) uncertain but it is, nevertheless, reasonably probable that the liability will arise in the future and its economic cause arose before the balance sheet date. Furthermore, the debtor has to be able to seriously expect that it will be taken up.

... their use in the case in question

The case that was ruled on concerned such a liability that was, in principle, of uncertain timing or amount. The key question concerned the point at which the economic cause of the liability arises. Specifically, did the economic cause 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, the presence 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 where that liability would arise in the future depended solely on economically immaterial defining criteria. Therefore, the legal 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 now argues that, for similar developed bonus points systems or customer loyalty card schemes, the economic cause will lie in the past; this is thus a differentiation in terms of BHF case law. The purchase transaction for which bonus points are granted is not just the reason for granting bonus points as such, but also the criterion for the number of bonus points that have to be credited. The entitlement of the holder of a customer loyalty card to a future price deduction thus depends, in terms of the reason and the amount, on a purchase 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 criterion because the loyalty cardholder’s benefit neither gives rise to the transaction nor influences its amount.

Please note: The additional requirements for the creation of 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 through the everyday practice of such a bonus point system or loyalty card scheme and were thus also not relevant to the issue 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 sheet date and
• the amount of which is likewise fully determined as a Euro value from this transaction and
• that can be unconditionally used as a means of payment to offset the purchase price in future customer transactions after the balance sheet date, in the future, the recognition of a provision for liabilities of uncertain timing or amount in the financial and tax accounts will be mandatory. Merely a percentage discount off a future transaction after the balance sheet date would not be sufficient because, in that case, the size of the future transaction would determine the amount of the benefit as a Euro value for the customer.

... with a broad impact

Consequently, it is not only all highly developed bonus point systems or customer loyalty card schemes, comparable with the one in the case that was ruled on, that will fall under the provision requirement but, according to the view expressed here, a large number of simple customer loyalty 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, by bakeries, car wash facilities, espresso bars, or chemists. Here, a stamp or sticker is typically added to a customer card for each transaction, although the number of stamps or stickers depends on the amount of that transaction value. Once the card has been completely filled, the customer gets a loaf of bread, an espresso or a car wash free of charge, or a specific accumulated Euro amount is deducted, as a quasi means of payment, from a future purchase – this is frequently the case with chemists.

Even in the case of these simple systems, it is solely the original purchase transaction that determines the amount of credit to which the customer will be entitled. The fact that no written agreement is concluded here would not be a sufficient reason to differentiate this from the case that was ruled on because agreements can also be concluded verbally and there would, at least, be a de facto obligation to offset or redeem the credit on the loyalty card issued by the company.

Measurement issues

In all cases, the provision must not be recognised at the full Euro value amount of all the issued bonus points or customer cards with credits, but instead only at the amount of the full costs that will arise in relation to future redemption because the issuing company will only incur the latter amount. Economically speaking, this would be an obligation to supply goods as cash payments are excluded. 

Please note: Furthermore, the probability of redemption has to be taken into account, i.e. an additional amount should be deducted to cover the bonus points or customer cards with credits that are likely not to be redeemed.