Loyalty programmes and material rights

Loyalty programmes in practice: an example

A customer spends 100 and earns 10 points, each worth 1 off a future purchase. From experience, the retailer expects 80% of points to be redeemed, so the standalone selling price of the points is 10 x 1 x 80% = 8.

At the sale: Dr Cash 100, Cr Revenue 92.59, Cr Contract liability 7.41. Later, the customer redeems 4 points. Because 8 points in total are expected to be redeemed, 4 / 8 of the liability is released: 3.70 of revenue. Unredeemed points expected to lapse are effectively recognised as the others are used.

How are redemption rates estimated and updated?

From the programme's history, by type of member or reward if behaviour differs. When the estimate changes, the liability is remeasured with a cumulative catch-up, which can create noticeable revenue adjustments for large programmes. Changes to the programme, such as shorter expiry periods, often change redemption behaviour, so history needs adjusting.

An example of a change in the redemption estimate

A retailer's liability for unredeemed points is 7,400, based on an expected redemption rate of 80%. New data shows members now redeem 85% of points. The retailer remeasures the liability for the higher expected redemptions and recognises the change as a reduction in revenue in the period, rather than restating earlier periods.

What about points sold to partners?

Retailers often sell points to partners, such as a bank issuing a co-branded credit card that awards the retailer's points. The price the bank pays may cover both the points and other elements, such as the use of the retailer's brand and access to its customers. The retailer allocates the price between them, deferring the part for points until redemption and recognising the brand licence over the agreement.

How does point expiry affect the accounting?

Expiry rules shape the redemption rate. Points that expire after a period of inactivity lapse more often, lowering the expected redemption rate and the amount deferred at each sale. When points expire, any remaining liability for them is recognised as revenue.

When is a reward not a material right?

When it gives the customer nothing they would not get without the purchase, such as a discount available to everyone. Small, immaterial rewards may not need separate accounting. Most points programmes, where rewards build up over many purchases, are material rights because customers would not receive them otherwise.

How do coalition schemes differ?

When points are issued by a third party, such as an airline or a coalition loyalty company, and the retailer buys them to give to its customers, the retailer usually acts as agent for the points: it recognises revenue net of the amount paid to the scheme operator, and has no liability for future redemptions. When customers redeem coalition points in the retailer's own stores, the retailer is paid by the operator and recognises revenue for the goods supplied.

What about tiered memberships and paid clubs?

Membership fees for paid clubs that give discounts or free delivery for a year are usually recognised over the membership period. Tier status, such as gold membership earned through spending, may itself be a material right if it gives significant future benefits.

What do retailers disclose?

The contract liability for loyalty points, its movements, and the judgements on redemption rates. See gift cards and breakage, allocating the transaction price and retail accounting.

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