In: Accounting
2. TurboCard credit card company offers a loyalty program to its credit card users whereby the credit card company gives the credit card user points for amounts purchased from merchants when using the credit card. These points may be accumulated and redeemed for a number of different goods or services, including cash-back. TurboCard separately enters into arrangements with merchants under which the credit card company provides the financing for the transaction between the merchant and the credit card user, in return for which the credit card company receives a stated fee from the merchant. When the credit card user uses the credit card to make a purchase from a merchant, TurboCard honors its agreement with the merchant and advances the merchant the funding for the amount of the transaction after deducting the fee to which the credit card company is entitled. However, as a result of that transaction, TurboCard now also has an obligation to the credit card user to provide the specified number of points in the loyalty program.
Required:
a. How many performance obligations are involved in these activities?
b. Assuming there are two performance obligations, how would revenue be recognized?
c. Assuming there is only one performance obligation, how would revenue be recognized?
1. No of Performance Obligation Included..
A performance obligation is a promise to deliver a good or provide a service. Basic unit to recognise revenue. A contract with one person may have more than one performance obligation. A good measure to determine separate perfomance obligation, 'Weather it can be sold on standalone basis?'
First Obligation is to pay on behalf of Card holder in consideration of stated fee say x%
Second Obligation is to provide additional benefits to Card holder in form of Points, Cashback labelled as Loyalty Programme.
( Another possible view second obligation to be considered under Contract with Card Holder )
2. Revenue recognition in case of Two Performance Obligation
Revenue is to be reconised when the obligations has been performed.. In case of More than 1 performance obligations , Contracted price is to be bifurcated between each obligation and must be recognised as revenue only on performance of that obligation..
Example :
3. Revenue recognition in case of Single Performance Obligation
Simply Identify the contract price ( readily available in Contract ) and recognise as revenue when Obligations are performed..