Hotel loyalty points

Why are hotel loyalty points a separate obligation?

A member who earns points on a stay gets a right to future stays that a non-member paying the same price would not get. IFRS 15 treats an option for future goods or services that gives the customer such a material right as a separate performance obligation, so part of the price of today's stay is really a payment for future free nights. Revenue for that part is recognised only when the company provides the future stays, or when the points expire. See hospitality accounting and performance obligations.

Hotel loyalty points: points earned on stays

A hotel group's members spend US$ 10,000 thousand on stays in a year and earn points that can be exchanged for free nights worth 4% of their spending, 400 thousand at face value. From its experience, the group expects 80% of points to be redeemed, so the standalone selling price of the points is 400 × 80% = 320 thousand. The stays themselves have a standalone selling price equal to the 10,000 thousand paid.

The price is allocated in proportion to standalone selling prices: 10,000 × 320 ÷ (10,000 + 320) = 310.1 thousand to the points, and 9,689.9 thousand to the stays. Room revenue is therefore 9,690 thousand, and the points are a contract liability of 310 thousand. If, by the end of the next year, members have redeemed half of the points expected to be redeemed, the group recognises 50% of the liability, 155.0 thousand, as revenue.

How is breakage estimated?

Some points are never used, because members lose interest, do not collect enough for a reward or let them expire. Hotel groups estimate this breakage using statistical models of members' past behaviour, and build it into the revenue pattern: revenue is recognised as the points expected to be redeemed are redeemed, so the value of points expected to lapse is recognised along the way rather than at expiry. When the estimate changes, the revenue recognised to date is adjusted through a cumulative catch-up. Changes to expiry rules or reward prices can move the estimate significantly. See breakage on unused tickets.

What happens when points are redeemed at other hotels?

In a group that mostly manages and franchises hotels, a member may earn points at one owner's hotel and redeem them at another's. Hotels where points are earned usually pay the programme a fee for the points their guests earn, and the programme reimburses the hotel where a free night is taken. The programme holds the contract liability for the points. When points are redeemed, whether the programme recognises the full value of the free night as revenue, with the reimbursement as a cost, or only the net amount, depends on whether it controls the room before the member receives it. See hotel franchise fees.

How are points sold to co-branded credit card partners treated?

Banks pay hotel groups large sums to issue co-branded credit cards, buying points to award cardholders and the right to use the hotel brand and market to its members. These contracts contain several obligations, and the price is allocated by standalone selling prices. For a bank paying 1,000 thousand in a year:

The brand licence is a right to access intellectual property, so its share is recognised over the agreement, often based on cardholders' spending. The points' share joins the points liability and becomes revenue when the cardholders redeem them.

What about elite status benefits?

Members with elite status receive benefits such as room upgrades, late check-out and bonus points. Bonus points are accounted for like other points. Other benefits are assessed as possible material rights, but many are judged immaterial or are provided at little cost when rooms are available, so groups often do not defer revenue for them. The judgement should be documented.

How does US GAAP differ?

ASC 606 has the same material right model, so US hotel groups also defer part of the price of stays and of co-brand card fees for points, and estimate breakage. Airlines and retailers face the same questions. See frequent flyer programmes and retail loyalty programmes.

This guide is general information. It is not tax or legal advice for your situation.