Good evening. My guest today is Michał Kariozen. He is a partner at Mac Auditor and a long-standing lecturer and member of staff at the Department of Management Accounting at the Warsaw School of Economics. Please join us. Katarzyna Nawrocka: „On loyalty schemes at night”.

Good evening.

Good evening.

Michael, we’re going to be discussing the perspective of a chartered accountant when dealing with a loyalty scheme. But before we do that, I’d like us to explain to our viewers what a chartered accountant does and what the differences are between a chartered accountant, an accountant and a tax adviser.

Right. Well, a chartered accountant carries out financial audits. That might sound rather serious, and not everyone immediately realises what it involves, but amongst these financial audit activities, the most recognisable and widespread is the examination of financial statements – in other words, an audit. The role of a chartered accountant is to carry out an audit of the financial statements, the end result of which is the issuance of an audit report; in this report, we can read whether the financial statements have been prepared fairly and correctly. So the main element of the audit report is the opinion. In short, the chartered accountant expresses an opinion on the financial statements. In other words, the statutory auditor provides the user of the financial statements with a certain level of assurance that the financial statements before them have indeed been prepared fairly, and that these statements can be relied upon when making decisions. And that is, and that is the main role of the chartered accountant – precisely the role of the auditor. Of course, a chartered accountant sometimes provides other services as well, but I don’t think we need to discuss this in detail here, as we would probably have to devote a separate discussion to it. As for the bookkeeper, well, the bookkeeper’s role – even though it also involves bookkeeping, and the chartered accountant also deals with bookkeeping – is, however, entirely different. This is because the role of an accountant is to maintain the accounts; in short, the accounts serve to record, in a systematic manner, the financial effects of the transactions carried out by a given entity. So the bookkeeper is responsible for maintaining the books. And what comes out of these books? Well, these books are later used to produce, amongst other things, financial statements, but this is usually on an annual basis. And it is precisely these financial statements that are subsequently audited by a chartered accountant, yes. However, these accounts also give rise to various other reports, produced at different intervals, particularly on a monthly basis. These reports may include, amongst other things, reports used for tax purposes. Because when we prepare a tax return, we should note that this is also a kind of report. So, the accountant is, of course, also responsible for tax settlements, whether on a monthly or annual basis. Because let’s remember that some taxes are annual in nature; for example, CIT – corporation tax – is an annual tax. Admittedly, we make advance payments every month, but the final settlement is annual. Whereas VAT is a tax that usually operates on a monthly cycle. So, does the accountant work on a day-to-day basis with the company they’re employed by, or – if they’re an external accountant because the company uses outsourcing – does the chartered accountant, sorry – the accountant, the accountant carries out these services on a monthly cycle, or is it often on a day-to-day basis? Yes. Often it’s simply day-to-day work: collaborating with the client, maintaining constant communication with them, working with accounting documents, and liaising with the tax office. Well, I could go on and on. Within this annual cycle, this includes, amongst other things, drawing up the financial statements and preparing the annual tax returns. So the accountant works very closely with their client or employer. It depends on whether we’re talking about external or internal accounting. A chartered accountant, however, must be independent of the client, in accordance with professional standards and legal requirements, yes.

Let me just check. So a chartered accountant can’t be a permanent employee at our company?

Absolutely – they cannot be a permanent employee. They cannot be a shareholder or partner. They cannot have any family ties. In other words, the auditor must be impartial and independent. These requirements are very strict. In fact, the Act on Statutory Auditors clearly states that an audit of financial statements carried out in breach of independence is invalid by law. And let’s remember that for many companies, an audit of financial statements is a legal obligation. So if we carry out this audit… and it is conducted in breach of independence – it will be invalid by law, meaning that the company has failed to fulfil this obligation at all, which carries serious consequences, including criminal penalties. But that is not all, because, for example, if the financial statements show a profit, and the shareholders subsequently wish to distribute that profit or pay a dividend, whilst there was an obligation to have the financial statements audited, it may turn out that the resolutions on profit distribution passed by the shareholders are also invalid, because the audit of the financial statements was found to be invalid by law. Here, too, this independence is particularly, particularly important, and that is why statutory auditors are subject to numerous restrictions when it comes to cooperating with their clients in areas other than auditing. In principle, a statutory auditor should focus on the audit, and this day-to-day contact is to some extent limited, as the auditor is not expected to participate in day-to-day accounting processes, but rather to verify subsequently whether the accountants’ work is correct.

We already know what a chartered accountant and an accountant do, and what the differences are between their roles. Now for the final area I asked to have explained: the tax adviser.

Sure. Well, there are times like this – times when it’s hard to be an expert in everything. Even if some people think that finance and accountancy is an area where an accountant or a chartered accountant ought to be thoroughly knowledgeable, that’s only half the truth. Because so many of these financial and business issues are now so complex. Every year, we see a growing number of different legal regulations, interpretations issued by tax authorities, court rulings and so on. We have European law, which, for example, is of enormous significance when it comes to VAT. If someone were to claim that they – be it an accountant or a chartered accountant – are thoroughly well-versed in this, that and the other, they would often be misrepresenting the truth. We need these specialists to help us. That is why we need tax advisers. Clients often use the services of an accountant – for example, an accountancy firm – but at the same time they use the services of a tax adviser who will identify, identify risks and work with their client and also with the bookkeeper to ensure „compliance” – as we often say in English – that is, compliance with the regulations. Ensuring that all requirements are, are met. In fact, when we talk about a tax adviser, I think we’re really just talking about one example of a specialist who can help us with these matters in the financial sphere. Because sometimes we may just as well need the help of a lawyer. We may sometimes need the help of an actuary, yes. So let’s note that, in fact, this… We’re currently dealing with such a high level of complexity that we need these specialists. It’s just like how, in the past, we might have simply gone to see a doctor, but today it’s hard to imagine just saying, ‘I’m off to see a doctor’. All right, but which one, exactly? Which specialism? It’s the same in business and finance today – the level of specialisation is very, very high. Although perhaps I’ll just say, to conclude, that accountants and chartered accountants are indeed professions where you need to be able to make a great many connections. We don’t necessarily have to be specialists in absolutely everything, down to every last detail, but we do need to be able to make connections – sometimes even just in broad terms – with almost everything. Because if I fail to make the connection, perhaps I won’t at all… I might overlook some important area in my work, and that could lead to major problems. As an accountant or a chartered accountant, I need to be able to make connections well enough and keep up to date with various issues and new developments. But not just new developments. I also need to remember what came before, if only to identify such risks. Perhaps there’s a problem; perhaps we need to seek specialist help. It’s already a great deal that I didn’t overlook it and flagged the issue. What happens next – whether my client takes my suggestion on board – well, that’s another matter. But I’ve already flagged it up. This is precisely the modern role of the accountant and the chartered accountant – an interdisciplinary role, but not the be-all and end-all.

Now for a few figures and statistics. There are at least 350,000 accountants in Poland, 40,000 accountancy firms in operation, and around 70,000 accountants hold a certificate authorising them to provide bookkeeping services. At the same time, around 3,000 people work as chartered auditors. And now, looking at loyalty programmes – of which there are 120 in Poland, some aimed at end consumers and others at business-to-business clients – we have 100 such programmes. This seems like a very niche venture when it comes to collaboration between a chartered accountant and a loyalty programme organiser.

Hmm. Well, I can see you’ve put in a lot of work gathering all that data. If we were to say that this is a niche area, on the one hand we could compare these figures – how many accountants we have, and how many loyalty schemes there are – and that might indeed lead to the conclusion that only a few accountants, chartered accountants or tax advisers have actually come across this sort of topic. That’s true. But on the other hand, let’s remember that in business, across many sectors, there are currently a whole host of such niche topics that we could identify, yes. A whole host of services are emerging which, until recently, didn’t exist – they’re something new. I don’t know, until recently there weren’t – apps weren’t springing up like mushrooms after rain – the sort that each of us has somewhere on our phones and uses. Right now, a whole host of such apps are being developed. So how is an accountant or a chartered accountant supposed to cope with all this, constantly coming up against new developments? Well, actually, this brings us back to what we were saying just a moment ago. An accountant or a chartered accountant isn’t necessarily meant to be the be-all and end-all. An accountant or auditor must operate within certain parameters. So, above all, what’s important is understanding – understanding, or perhaps being prepared to understand – the business. So, I come across a business, perhaps one that’s completely new to me. The business operates according to a certain model; there are contracts in place, or being prepared for conclusion – for example, contracts relating to loyalty schemes. And now this specialist – be it an accountant or a chartered accountant – wonders whether they will be able to cope with such a new business, a new model, a new type of contract, which will subsequently have consequences for accounting, tax and reporting purposes. If this auditor or accountant has that basic, yet solid, foundation. Basic, solid – well, adequately good preparation for dealing with the analysis of contracts, not necessarily on their own, but often with the help of specialists. Perhaps I’ll come back to that in a moment. But if such a person is able to take the necessary steps to understand the business and grasp the underlying model, they will also be able to handle a seemingly niche issue such as a loyalty programme, because what impact will such a loyalty programme have? Well, as is usually the case in accounting – it will translate into some revenue and some costs. Various types of assets and liabilities will probably arise along the way. So we’re operating within a certain framework governed by established principles. This framework, which tells us exactly how to treat revenue, costs, assets and liabilities, simply needs to be applied correctly here. I also believe that, of course, an accountant or a chartered accountant should know their limits and realise that there are certain tasks they cannot undertake. For example, if I were, I don’t know, to be asked to audit the financial statements of a large insurance company, and I do not specialise in insurance, I would probably refuse to provide such a service as an auditor. But it shouldn’t be the case either that an accountant or a chartered accountant is paralysed at the mere mention of any new business concept – be it new or niche – because loyalty schemes may not be all that new, but, the fact that there aren’t that many of them doesn’t mean they’re all that widespread. In fact, very few people have encountered them from a financial or accounting perspective. But should that paralyse me, or should I be afraid of it? Well, probably not, because…

This leads me to conclude that everything new seems difficult at first, but only at first.

Oh, oh, of course it is. Well, if we were to shy away from new developments, I suppose we’d be in for some very tough times, because right now we’re living in a world of new developments. Practically every day brings something new. But let’s note that accountants are grappling with these new developments all the time. For those who want to succeed in this industry, coming to terms with these new developments is absolutely essential. And I suppose everyone has now got used to starting their day by glancing at various websites, just to see whether there are 3 or 30 new developments today.

That’s true. Assuming that two accountants are working on a single loyalty scheme, that gives us just under 0.10% of accountants. And I would very much like us to discuss in this episode the challenges faced by an accountant who manages such a loyalty programme. Perhaps a better way of putting it would be ‘works with the organiser of the loyalty programme’. So that we can outline the main principles.

Sure. Well, here, here the challenge is indeed considerable. And I think it’s primarily a communication challenge. I mean, the accountant must first of all know what to ask about and, and expect this very assertively. Because let’s remember that sometimes, between the organiser of such a loyalty programme – which, from the accountant’s point of view, is the employer or the client – From the organiser’s point of view, it might be a bit surprising that the accountant is asking me for this, and that, and the other. For example, various documents relating to the programme. But why is the accountant asking for this? The accountant has to deal with what I’ve already touched upon briefly earlier, namely when and in what amount to recognise revenue, costs, assets and liabilities. I could perhaps list a few more things here, but I think I’ll stick to these main categories. So, a loyalty programme from the perspective of its organiser – who, as I understand it, runs this programme for the benefit of their client or clients – what will this loyalty programme generate? Well, the intention is to make a profit, yes. That’s why we’re the organiser of a loyalty programme – to make a profit from running it. Sure. Right, so now let’s look at this from an accountant’s perspective – where do the profits come from? Profits are the difference between revenue generated and costs incurred. Simple. Right, but now we’re getting into the finer details, namely when that revenue is recognised. Well, in accounting, it’s a bit like this: when we’re allowed to recognise revenue is often – I wouldn’t say so much a matter of debate – but rather a matter that requires careful attention. It’s easier for us to determine when revenue is generated – say, from the sale of yoghurt in a shop – a customer came in, bought the yoghurt – that’s the moment when the sale took place, and someone generated revenue. Right. But when we provide services – when we provide services – it’s a process that stretches over time, and it’s often not a process that will necessarily generate that revenue on a linear basis. For example, as an organiser, we might receive a fee for running the programme as a whole – and this might indeed be a fee that is spread out more or less linearly, or at least it should be; the effect in the accounts will be linear when we’re talking about revenue. But there may also be other factors that will cause this revenue to arise. It could be a success fee, or it could be other events arising from the structure of our programme, which will determine when the revenue is recognised. So now we have revenue, but what about costs? In accounting, there is a key principle – the matching principle. In other words, if we recognise revenue in the accounts – and consequently in the financial statements – then costs commensurate with that revenue should appear in the same period, as we say. That is, costs that relate to that revenue either directly or indirectly. Maintaining the matching principle is absolutely, absolutely crucial. And that is why we must design our accounting system in such a way that it enables us to maintain this matching principle. Now, what does it mean to design an accounting system? Well, we design the chart of accounts that we use. We design business reports and auxiliary files that help us with various types of calculations. But let’s also remember that before all that, what comes first? There are transactions, and these are followed by accounting documents. And now, such an accounting document – for example, an invoice – must be correctly interpreted by the accountant. How is the accountant supposed to do this? They must obtain information from management, that is, from the people who understand why a particular cost was incurred. This is so they can answer the question of whether this cost is an immediate expense relating to revenue – and therefore one that will appear in my profit and loss account straight away – or whether it is a cost incurred to generate future revenue. Well, if I am only due to generate a certain amount of revenue in the future, but have already incurred the cost, then that cost must, as it were, wait its turn in a sort of ‘waiting room’. In other words, it temporarily constitutes one of my assets. Of course, assets may also lose value in the meantime, but that’s probably a topic for a separate discussion. So here I’ve given—I’ve given this rather brief example, which of course doesn’t cover everything. So we have this revenue, which should appear at the appropriate time. We have costs that should be commensurate. Certain assets may arise in the meantime. And what’s also very important here is that, of course, liabilities also arise. The nature of such a programme may be such that, as the organiser, I am obliged to bear certain costs. But—and here I’d like to move smoothly from the organiser’s perspective to that of the customer. Well, because in reality, when we organise a loyalty programme, our customer – by opting into the programme – is, so to speak, taking on certain obligations. Obligations towards whom? Towards consumers, for example. So a customer who buys a can of drink for 2 zł has the right to buy another can for half price. This means that a liability has arisen to provide that end customer, the consumer, with that next can of drink at that reduced price. So, in reality, we’re talking here about liabilities that arise, which sometimes need to be estimated. And when we have a liability that we need to estimate, we often call it a provision, yes. So we estimate these liabilities of ours, which of course means that, as a result, we are also estimating costs. Because every event in accounting – practically every one – has two effects at the same time. When we talk about incurring costs, these are usually accompanied by the creation of liabilities, which we later have to settle – sometimes by paying them off, sometimes by settling them in another way. So, in fact, if I were to summarise what I’ve said, I’d say that the role of an accountant is to have a thorough understanding of the details of a given programme. As I said earlier, not necessarily on their own. Rather, with the help of managers and lawyers, who have probably drawn up the terms and conditions, and so on. To understand the programme thoroughly, to grasp its essence, to organise communication with the client effectively, to manage the document workflow, and to describe these documents in a way that facilitates their subsequent interpretation and recording in the accounts. Why? Precisely to achieve the end result, which is the correct recognition of revenue and costs, but also, in certain situations, assets and – very often, very often – liabilities.

Michael, we’re staying on the topic of challenges because I’d very much like us to discuss right now the specific challenges faced by an accountant who works with, or for, a company that runs loyalty schemes – and there are three types of these. Namely, we have points-based, discount and cashback schemes. And, of course, there are also hybrid versions on the market. We also have the option of using multi-partner schemes, which is why there are differences. Let’s talk about these differences.

Here we’re returning to a point we’ve already touched on briefly. Every programme of this sort is, in a way, tailor-made. We can certainly group them into these categories, but I think it’ll be easiest if we use some examples to illustrate the point.

Let’s break down your answer by specific type of loyalty scheme. Let’s start with discount schemes.

As for discounts, well, that’s great. So let’s go back to the example we just gave a moment ago. We have a discount scheme where, for example, Mr Kowalski buys this can of drink – let’s just say straight away that he buys it for 5 zł, for example. But he’s entitled to buy another can of drink for 1 zł. Right, so in that case, the accountant asks himself what the revenue was from the sale of that first can of soft drink. I sold a can of soft drink for 5 zł, so I have revenue of 5 zł. All right, but the accountant always considers the economic substance of a given transaction. After all, Mr Kowalski is highly motivated to buy the next can for just 1 zł, given that the standard price is 5. What does this mean? It means that Mr Kowalski will almost certainly take up this option. So perhaps he’ll come back to the shop the next day, where his right to purchase that next can is somehow documented. I don’t know if there’s some sort of record, a QR code or something else in the app where he says: „I’d like another can; here’s my proof of eligibility to buy this next can for 1 zł.” What does this mean? It means that, in reality, what are we selling? Two cans in total for 6 zł. So what was the actual revenue from the sale of that first can? 3 zł. And from the second can as well – also 3 zł. Now then, is this mechanism I’ve described in such a very simple example—perhaps loyalty scheme specialists might correct me here and say, „No, that’s not quite right”— but I’ve given a simple example so that we can visualise it in the simplest possible way. Can we find such an example, I don’t know, in the regulations? Can we find it in the Accounting Act, which states: in this type of situation, one should proceed in such and such a way? Well, not quite, because accounting regulations are of a framework nature. If we look at the Accounting Act, it really is very terse. Do we have any guidance? Yes, we have the International Financial Reporting Standards. We do, but as regards companies other than those listed on the stock exchange, such as banks or certain other entities, most Polish entities are not obliged to apply international standards. But sometimes it is worth it; they do come in handy. We have International Financial Reporting Standard 15, which primarily concerns revenue, but also indirectly relates to costs, even though this is not explicitly stated in the standard’s title. And this standard guides us on how to proceed. So, by drawing on such an international standard, what can we do? We can set out appropriate, detailed regulations to be adopted in our accounting policy. Let me remind you here – every company should have a written accounting policy, that is, a document setting out the various principles governing the recording and presentation of financial data in the financial statements. And this accounting policy is precisely where we can go into detail and translate these typical business scenarios into accounting practice. What can an accountant do here? An accountant can advise the company’s management on how the accounting policy should be amended or reformulated to incorporate, for example, the mechanism I’ve described, so as to prevent a situation arising where, for example, I recognise the revenue from the sale of that first can from our simple example at 5 zł, and then I draw up the financial statements, the auditor comes along – that’s where we started – and says, ‘Oh no, no, no. ‘The timing of revenue recognition here is completely wrong. In fact, for now you should only recognise 3 zł’,” right. Of course, I’ve used very small amounts here, but let’s imagine programmes where the sums involved aren’t 3 zł or 5 zł, but let’s just imagine programmes where we’re talking about hundreds of millions, right. And certain events take place, perhaps at the turn of the year. Well, here the consequences could be, could be very, very far-reaching. That’s why, to cut a long story short, I’d first and foremost emphasise an element I might call the ‘revenue recognition point’ and also the valuation of that revenue. Let’s remember – this valuation, this valuation of that revenue, won’t necessarily be the amount that appears on a fiscal receipt or on an invoice in a B2B transaction. We can, of course, make accounting entries on an ongoing basis based on these receipts and invoices. But when it comes to the year-end, or even a shorter reporting period – a month or a half-year. Perhaps we have a company listed on the stock exchange – it must, it must publish quarterly, half-yearly and annual reports – then for every such date that is significant from a reporting perspective, particularly external reporting but I think also internal business reporting, we must be able to accurately capture revenue on each such date. And, of course, the corresponding costs, so that our financial results reflect the actual economic substance, rather than seemingly random figures that fail to capture precisely those snags and details arising from a given programme.

We already know how discount loyalty schemes work. So let’s move on seamlessly to the points-based ones.

Yes. Well, of course, these loyalty schemes can vary greatly, because if the end customer collects points, they can use them to get some sort of reward – I don’t know, free goods or services. But they can probably also get discounts sometimes, yes. It could be a mix of both. So a loyalty scheme can be a bit of a discount scheme as well, or perhaps not at all. Here, here, too, the situations are probably very varied, but let’s focus for a moment on the simplest programme we can imagine: I collect some points, and at some point I can use them up, spend them, yes. So I’ve collected a certain number of points, for example by buying petrol, and now I’m entitled to receive a toy car, which I’ll happily give to my child, whilst using those points to make my next petrol purchase. It turns out I’ve got enough of these points. I’ll ask for a Resorak and I’ll happily receive it for free, or perhaps for 1 grosz, because the tax authorities have decided it shouldn’t be free. It should be for 1 grosz, but in practice I receive this Resorak – or perhaps something else, or perhaps something of greater value – free of charge in exchange for my points. So now, what does this mean? From an accountant’s point of view, it often means a certain time lag; we’ve talked a lot about this principle of matching, where revenue and costs must be matched. I might add here that – and this might help explain what this matching principle is all about – it means that not only must the costs relating to a given revenue appear in the same period, but they must also appear in full. So, if I’ve sold my customer fuel totalling 1,000 zł, because he’s just accumulated a certain number of points by purchasing fuel totalling 1,000 zł. This means that my financial statements should also include the full costs corresponding to that revenue of 1,000 zł. What will be the main cost? Well, obviously, the purchase price of the fuel I sold. But these costs will also include indirect costs, such as the costs of running the petrol station – but what else will be included? There should also be the cost of the reward my customer will receive in exchange for their points. The problem is simply that the prize will often be issued at some point in the future. So here we have a cost whose incurrence may be deferred over time. So what needs to be done now? A liability must be recognised, often on an estimated basis. We’ll call this liability a provision. As I’ve already mentioned, we call an estimated liability a provision. Why do we need to estimate this? Well, of course, it’s also the case that whilst customers may earn these points, not all of them will necessarily redeem them. So the element of probability comes into play here. Let’s take this opportunity to note that, in modern accounting in general, we have plenty – really, plenty – of situations where we use estimates. Sometimes we need specialists to help us with these estimates – for example, specialists in probability. It may be the case that, with a loyalty scheme like this, in order to estimate the costs accurately, we need to build a certain model. Especially if it’s a large loyalty programme – we need to build a model that shows, for example, consumer behaviour in terms of how they use up or redeem these points, in order to accurately estimate the probability of incurring costs of a specific amount. And here we may sometimes need, I don’t know, an actuary or some other expert who knows how to construct such models. So, to summarise again, in such a situation the accountant should get in touch with the client and say: „Listen, I need your cooperation – or that of your specialists – so that we can accurately and comprehensively estimate the costs, which will in turn result in the recognition of appropriate provisions”, and later we’ll use these provisions as and when these points are redeemed – that is, for example, when rewards are issued. So here we’re dealing, first and foremost, with the issue of costs and the associated provisions. Although, as I said earlier, if this points scheme is also a discount scheme, then we return to the issue we discussed earlier – namely, the amount of revenue generated at each stage. Well, because that promised discount may be a sign that the revenue shown on the receipt or invoice is perhaps overstated, because somewhere in there is that promised discount, and the average selling price I would expect is actually lower – which is precisely the result of this discount scheme; indeed, the granting of discounts may well be structured precisely through this redemption of points. So I suspect that these hybrid variants aren’t all that rare here either.

And that leaves us with the third type of loyalty scheme – cashback.

On the one hand, we might have a very simple situation: for example, if I use a payment card and make a purchase for 100 zł, and the loyalty scheme is run by a bank – which, of course, wants to promote card payments. I’ve made a purchase for 100 zł as the cardholder, and then, say, 50 groszy is credited back to my bank account. From the organiser’s point of view, what is this? It’s simply a cost. However, well, you know – you also mentioned multi-partner programmes earlier; we’re all familiar with programmes like that. And here, of course, if I can earn points or receive cashback – perhaps through some sort of cross-partner scheme where multiple partners are involved at the same time – well, then perhaps, perhaps it may be the case that a dedicated team is needed at all. So if we’re getting into such more complex structures, well, then we’re probably talking here about setting up a small team or a sort of dedicated unit, which will first design a suitable IT system to help us account for this, ensuring that the revenue and costs for each programme partner are recorded in the correct amounts. And these are often even international programmes, so the level of complexity is high, and there are surely specialists who are capable of designing such systems at this IT level.

Michael, I’d like to thank you very much for speaking with me today, but we haven’t covered everything yet, so I’d like to assure our viewers that we’ll be back to finish our conversation and clarify some other very important details.

Well, I’ve certainly gone on a bit, so I’ve got no choice but to accept your offer.

I’m really pleased. In that case, I’d like to invite you to the second part of the episode, in which my guest will be Michał Kariozen.

See you later.

See you later.