Accounting in the Nigerian Fintech industry

Business

ACCOUNTING IN THE NIGERIAN FINTECH INDUSTRY

Fintech companies in Nigeria often incur significant costs for customer acquisition, including referral incentives, bonuses, and promotional expenses. These costs, when deferred, are typically spread over the period during which the benefits of customer acquisition are realized, rather than expensing them immediately. Here's how they can handle this deferral:

  • Identifying and Categorizing Costs: Fintech companies need to categorize these costs properly, ensuring they are directly tied to acquiring new customers and will generate long-term benefits.
  • Accounting Treatment
  1. Deferral of Costs: Fintech companies can capitalize on customer acquisition costs as an intangible asset. These costs are then amortized over the period during which the acquired customers are expected to contribute to the company’s revenue stream. For example, if the average customer lifetime is 2 years, the acquisition costs can be spread over that period.
  2. Matching Principle: In line with the matching principle of accounting, the cost deferral ensures that the expenses match the revenue they help generate. This results in a more accurate reflection of profitability over time.
  • Financial Reporting and Compliance
  1. IFRS 15: For financial reporting in Nigeria, the International Financial Reporting Standards (IFRS 15) governs the deferral and recognition of revenue and associated costs, including those related to customer acquisition. Companies must ensure compliance with these standards, recognizing deferred costs in the appropriate period.
  2. Tax Considerations: Fintech companies should also consider the tax implications of deferring customer acquisition costs, ensuring compliance with Nigeria's tax laws regarding capitalized expenses and their amortization.

Fintech companies in Nigeria (and globally) account for acquisitions or mergers of other fintech firms under IFRS 3 (Business Combinations ), which governs how businesses recognize, measure, and report the acquisition of other entities. The standard provides detailed guidance on how to account for acquired assets, liabilities, and goodwill. Here's how the process works:

  • Identifying a Business Combination: Under IFRS 3, a business combination occurs when one entity gains control over another. This includes mergers, acquisitions of shares, or asset purchases where the acquiree is operating as a business. The fintech company initiating the acquisition is identified as the acquirer, and the fintech firm being acquired is the acquiree.
  • Accounting for Goodwill: Goodwill is recognized as the excess of the purchase price over the fair value of the identifiable assets acquired and liabilities assumed.
  • Recognition of Intangible Assets such as Patents, Licenses, Technology, Brand Names and Trademarks and Amortization of Intangibles. They are amortized over their useful lives unless they re deemed to have an indefinite life, in which case they are tested for impairment.
  • Recognition of Liabilities: The acquiring company must recognize any assumed liabilities such as deferred revenue, contingent liabilities and employee obligations at their fair values.
  • Disclosure Requirements: The acquirer must disclose extensive information about the business combination, including the total purchase price, the fair value of assets and liabilities acquired, the amount of goodwill recognized, and any contingent liabilities or consideration.

Revenue Recognition for Specific Fintech Revenue Streams

  • Subscription-Based Services: Revenue is recognized over time as the customer receives the continuous benefit of the platform. This aligns with the fact that the service is provided gradually throughout the contract period. If a customer pays for an annual subscription upfront, the fintech would defer the revenue and recognize it evenly over the 12-month period.
  • Transaction Fees: Revenue is recognized at a point in time when the transaction is completed. For instance, when a payment is processed, the performance obligation is satisfied, and the fee for that transaction is recognized immediately.
  • Other Financial Products (e.g., Loans, Credit)
  1. Interest Income: Fintech companies that issue loans or extend credit will recognize interest income based on the effective interest rate method in accordance with IFRS 9. This involves recognizing interest as it is earned over time, matching it to the loan balance.
  2. Service Fees for Financial Products: Fees related to financial products, such as loan origination fees or management fees, are recognized when the related services are provided or the product is delivered.
  • Disclosures Under IFRS 15: Fintech companies must provide detailed disclosures in their financial statements regarding the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. This includes:
  1. A breakdown of revenue by major products or services (e.g., subscriptions, transaction fees).
  2. Information about performance obligations, including when they are typically satisfied.
  3. Significant payment terms, including whether any variable consideration exists.

For fintech companies offering prepaid services or loyalty programs, the treatment of associated costs in the financial statements involves careful consideration of revenue recognition and expense matching principles. Here's a general approach for how these costs should be deferred and recognized:

Prepaid Services

      Cost Deferral and Amortization:

  1. Initial Costs: When a fintech company incurs costs related to prepaid services (such as customer acquisition costs, setup costs, or promotional expenses), these costs are initially recorded as assets if they provide future economic benefits.
  2. Expense Recognition: These costs should be amortized over the period in which the prepaid service is expected to be consumed or utilized. For example, if a prepaid service is expected to be used over 12 months, the costs should be amortized over the same 12-month period.
  3. Financial Statements Impact:
  4. Balance Sheet: The costs are initially recorded as a prepaid expense (asset) on the balance sheet.
  5. Income Statement: Over time, these costs are recognized as expenses on the income statement as the prepaid service is delivered or consumed.

Loyalty Programs

      Cost Deferral and Recognition:

  1. Initial Costs: Costs related to the setup and administration of loyalty programs (such as system development, marketing, and reward fulfillment costs) should be deferred and capitalized if they provide future benefits related to the program's operation.
  2. Expense Matching: The costs should be recognized over the life of the loyalty program or as rewards are redeemed. This ensures that expenses match the revenue generated from customer transactions that lead to the accrual of loyalty points.

      Financial Statements Impact:

  1. Balance Sheet: Initially, these costs might be capitalized as intangible assets or deferred costs if they are expected to benefit multiple periods.
  2. Income Statement: As rewards are redeemed or the program is operated, the deferred costs are amortized or recognized as expenses. Additionally, any costs associated with fulfilling rewards should be expensed as incurred.