What section of IFRS 9 does this relate to?

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I am trying to understand how buy now pay later businesses account for revenue. I have looked up the EIR method and cant see where it talks about  using the average period from intial payment to final installment (please refer bold text below).

Secondly, when buy now pay later recognise revenue, do they do that over the expected payback period, which would say 4 weeks for like Afterpay or over the period the customer pay, so if customer pays back in 1 year, the revenue would be recognised over a year cos the funding was settled in a year and not 4 weeks as expected.

 

Merchant fees Merchant fees are derived from the difference between the consumer’s underlying order value processed by the Laybuy platform and the amount paid to the merchant by the Group. The Group pays merchants upfront the net amount of the previous day’s orders less the merchant transaction fee, which consists of fixed and variable rates set per individual merchant agreements. The Group then assumes all non-repayment risk from the consumer. There are no interest or fees charged by the Group to consumers, other than late fees which are incurred as described below. Merchant fees are recognised in the consolidated statement of comprehensive income using the Effective Interest Rate (EIR) method in accordance with IFRS 9 Financial Instruments, accreting the merchant fees over the average period from initial payment to the merchant by the Group to the final instalment paid by the consumer to the Group. The Group defers merchant fees over the average time it takes for the collection of the receivable to occur, with the current average weighted duration to recoup end-consumer payments being approximately 34 days

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By paul.benny
27th Aug 2021 11:29

Most BNPL is not provided by the retailer. When you sign up to pay by Klarna or whoever, the retailer gets funds straightaway, less whatever fee the funder charges. There is thus no revenue recognition issue for the retailer arising from the deferred payment.

If you're looking at the revenue recognition for the BNPL provider, their revenue is the merchant fee. As you highlight, it's recognised over the loan period. I would say that's the contractual period. I believe that late and other fees charged to consumers are a significant part of the revenue. There is a case for looking at revenue on a portfolio basis and saying that revenue comprises merchant fees plus late fees and then spreading the aggregate over the average actual repayment period. Perhaps also slicing the portfolio into on-time and late payers and spreading the aggregate fees on late payers over the actual term.

Why do you ask?

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Replying to paul.benny:
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By mikechan
27th Aug 2021 12:17

Thanks for the response, Paul. Yes, I'm looking at this from the perspective of the provider, that merchant fee revenue. The company I referenced in my initial question, calculated a weighted average of how long it takes customers to pay back (irrespective of the fact that normally consumers are expected to make the payment within 4 weeks or 28 days), in this case, the provider is recognising revenue over 34 days and used that as the average period to recognise revenue - is this right to use how long it takes to repay as opposed to the contractual term? I guess it won't be practical to continue to adjust revenue as customers will pay back over different periods. The thing is that I can't find the standard to back that up and I was wondering where it says so in the standard.

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Replying to mikechan:
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By paul.benny
27th Aug 2021 12:34

If you register (free) at ifrs.org you can download all IFRS without charge.

IFRS9 is particularly tortuous and covers much more complex arrangements than 'simple' loans, but you should be able to find the relevant guidance.

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