Luxwood operates a customer loyalty programme as follows:
Under a LuxRewards Card™ system, each year, on the anniversary of the issue of each customer’s card, the store grants a non-refundable credit to each customer’s account according to a sliding scale based on aggregate purchases for the previous 12 months period. The credit is 2% up to $5,000, 3% for the next $5,000 and 4% thereafter. There is no limit. The credit may only be used to reduce the amount payable for LuxRewards Card™ credit purchases.
For example: Customer A commenced his credit card account a few years ago on 1 February so he is entitled to a credit on the anniversary of that date each year, based on his actual purchases for the previous 12 months. Therefore, at balance date, 30 June, an accrual is made based on the actual sales since 1 February although the actual credit cannot be accurately calculated and neither will it arise until the following financial year.
At 30 June 2020 Luxwood estimates that for the period up to that date its liability in respect of these credits is $220,000. In addition, it has already credited $245,000 during the year ended 30/6/20. The store estimates that, on average, 10% of these credits will lapse.