Loyalty glossary · 2. Accounting and finance (25)
Redemption Forecast
Redemption forecast is the estimate of how many issued loyalty points or rewards will be redeemed by members during a future period, expressed as a percentage of the outstanding balance. It drives the accrual for unredeemed points and the breakage allowance under ASC 606.
Redemption forecast is not a marketing metric. It is the liability estimate that feeds the accrual for unredeemed points on the balance sheet. Under ASC 606, the forecast determines how much of the transaction price allocated to points stays deferred and how much may be recognised as breakage.
The common error is to set the redemption forecast from historical redemption rates without adjusting for changes to award availability or expiry policy. A forecast that ignores a newly introduced expiry date or a reduced award catalogue understates liability and overstates current revenue. That is not conservative accounting, it is wishful thinking.
A programme issues 100 points with a value of 1 cent per point, so the total issued value is 1 dollar. A redemption forecast of 80 percent means 80 points are expected to be redeemed, a liability of 0.80 dollars, while 20 points are expected to break, worth 0.20 dollars. Raise the forecast to 90 percent and the liability becomes 0.90 dollars, cutting breakage by 0.10 dollars.
Award availability is the other side of the forecast. If the programme removes desirable awards or makes them harder to find, the redemption forecast should fall, not stay flat. A forecast that ignores award availability assumes members will redeem at the same rate even when there is less to redeem for, which is exactly the kind of optimism that inflates reported profit today and forces a restatement later.
The redemption forecast is checked by no one outside the company. Auditors test the arithmetic, not the assumption. That makes it the easiest liability line to manipulate without breaking a rule, and the one most worth questioning in any programme's financial statements.