Document ID: chunk:federal_register_of_legislation:F2019N00027:body:0:p4
Version: federal_register_of_legislation:F2019N00027
Segment Type: other
Provision Reference: 
Character Range: 8177–11112

some competitive advantage. Minor amendments to clarify the standards and the provision of guidance should ensure greater consistency of interpretation between stakeholders.

2.1                 Accounting Basis
When the initial compliance certifications for the net compensation requirement were being prepared by schemes and issuers in mid 2018, some stakeholders sought guidance on whether the standards required benefits to be calculated on a cash or an accruals basis.[4] The Bank clarified that the standards were drafted in a manner consistent with the former because they generally referred to benefits being 'paid' and 'received' rather than 'payable' and 'receivable'. However, from these discussions it became apparent that a number of stakeholders had assumed that benefits should be measured on an accruals basis.
The cash approach to the measurement of benefits was originally chosen as it was viewed as being both straightforward and – with one exception – consistent with the nature of benefits typically provided by schemes to issuers (i.e. periodic financial incentives and rebates). The exception was where schemes paid issuers up-front incentives relating to more than one reporting period, for example a lump-sum 'signing bonus' paid for entering into a contract with the scheme or 'migration benefits' to cover the cost of migrating an issuer's cards from one scheme to the other. Where a contract has significant up-front payments, it is likely that the issuer would be in breach of the relevant standard in the early years of the contract if a cash accounting approach was applied to these incentives. In view of this, for these types of payments, the standards allowed a deviation from a cash basis. Specifically, subparagraph 5.2(e) of the standards allows an incentive that spans more than one reporting period to be allocated across these reporting periods based on the number of months in each reporting period to which the incentive relates.[5] In practice, this has the effect of allowing up-front incentive payments that relate to the entering into of a contract – such as a signing bonus or migration benefit – to be allocated over the life of an issuance contract on a pro rata basis.
In informal consultation, many stakeholders noted that calculating net compensation using the current 'quasi-cash' approach was a highly manual process. They suggested that an accruals approach, aligned with recognised accounting standards, would enable them to source component data for the net compensation calculation from their financial accounts and thereby reduce their compliance costs.[6] Broadly speaking, an accruals approach seeks to align the recognition of expenses and revenues to their economic substance. Conceptually, an accruals approach could also improve the operation of the standard as it allows for the net compensation calculation for each reporting period to be less affected by (potentially