Loyalty Register glossary
ASC 606
The US revenue recognition standard. For loyalty programs, it treats points as a separate obligation, so part of each sale is deferred until points are used.
ASC 606, “Revenue from Contracts with Customers”, is the US accounting standard that decides when and how much revenue a company records. The FASB issued it in May 2014 (Accounting Standards Update 2014-09). Its core principle: record revenue as goods or services are transferred, in the amount the company expects to be entitled to. For a loyalty program, points earned on a purchase usually count as a separate promise, so part of the sale is held back as deferred revenue until the points are redeemed or expire.
Updated · By Loyalty Register Editorial TeamRelated terms
What are the five steps of ASC 606?
- Identify the contract with the customer.
- Identify the performance obligations in the contract.
- Determine the transaction price.
- Allocate the price to the performance obligations.
- Recognize revenue when (or as) each obligation is satisfied.
For a loyalty program, step 2 is where points become an obligation, and step 4 is where the price of each sale is split between the goods and the points, using their standalone selling prices.
Why do loyalty points count under ASC 606?
Because they give the customer a material right: something they would not get without making the purchase. In that case, the standard says, the customer in effect pays in advance for future goods, and revenue is recognized when those goods are delivered or the right expires. Starbucks defers revenue for the Stars members earn. Delta Air Lines treats a ticket that earns miles as two obligations, the flight and the miles.
How does the FASB’s loyalty example work?
The standard includes its own example. Customers buy $100,000 of products and earn 10,000 points, each worth $1 off a future purchase. The company expects 9,500 points to be redeemed, so each point has a standalone selling price of $0.95. The $100,000 is split: $91,324 to the products, recognized now, and $8,676 to the points. After 4,500 points are redeemed, the company recognizes $4,110 of points revenue and still carries a contract liability of $4,566.
How is breakage handled, and what should you watch?
Expected breakage is recognized in proportion to the pattern of redemptions, not all at once; Delta does this for SkyMiles. Value that must be remitted to a state under unclaimed property law stays a liability. Watch the standalone value of a point, the breakage estimate and rule changes, because each moves reported revenue. IFRS 15, issued alongside ASC 606, uses the same five steps.