Loyalty glossary · 2. Accounting and finance (25)
Ifrs 15
IFRS 15 is the revenue recognition standard that requires loyalty programmes to treat issued points as separate performance obligations. Revenue allocated to those points is deferred and recognised only when the points are redeemed or expire, not at the time of the original sale.
IFRS 15 changed loyalty accounting for good. Before the standard, a hotel could book the full room rate as revenue on the day of stay and treat the points as a marketing cost to be expensed later. The standard rejects that approach outright. It says the points are a separate performance obligation with their own revenue stream, and that revenue cannot be recognised until the obligation is met.
The hardest part is allocating the transaction price between the room and the points. A programme must estimate the stand alone selling price of a point, and that estimate must be based on observable evidence. The award chart is the primary evidence. A chart that makes redemption unattractive lowers the point value, which lowers deferred revenue and flatters near term earnings. The standard does not allow that kind of gaming.
The balance sheet now carries a contract liability for every point issued. That liability shrinks only when points are redeemed or expire. Award availability is the test of whether redemption actually happened. If a member tries to use points and the award is not available, the liability remains. The standard treats unredeemed points as an obligation, not a hope.
A hotel sells a 200 dollar room and credits 2,000 points. Each point has a stand alone selling price of 1 cent, so the transaction price splits into 180 dollars of room revenue and 20 dollars of deferred point revenue. If the points expire after 2 years and the member never redeems, the 20 dollars is recognised then, not before. Change the point value to 0.8 cents and only 16 dollars is deferred, which makes the room look more profitable on day one.
Accrual accounting is the principle behind IFRS 15. Revenue is recognised when performance happens, not when cash is received. The standard applies that principle to points for the first time. The result is that loyalty programmes can no longer treat points as a marketing afterthought. They are a separate line of business with their own revenue timing.
The discipline is good for members. A programme that must defer revenue for points has a financial reason to make awards available and to keep the award chart honest. The standard punishes programmes that issue points they cannot honour. That alignment of financial reporting with member value is the real point of IFRS 15.