Loyalty Register glossary
Revenue recognition
The accounting rules that decide when a business records revenue. For loyalty programs, they decide when money tied to points becomes revenue.
Revenue recognition is the set of accounting rules that decide when a business records revenue, and how much. The revenue recognition principle is that revenue is recorded as the business delivers what it promised, not when cash arrives. In the US the rules are set by ASC 606; many other countries use IFRS 15, which applies the same five steps. Loyalty points complicate this, because a single sale delivers goods now and a promise of a reward later.
Updated · By Loyalty Register Editorial TeamRelated terms
What are the five steps of revenue recognition?
- Identify the contract with the customer.
- Identify the performance obligations, meaning each distinct thing promised.
- Determine the transaction price.
- Allocate that price to the obligations, based on standalone selling prices.
- Recognize revenue when, or as, each obligation is satisfied.
How is it different from the accrual principle?
Accrual accounting is the wider method: revenue and expenses are recorded when they occur, not when money moves. Revenue recognition is the part of it that says when revenue has occurred. A business on the cash basis simply records revenue when paid.
How are points earned on a sale recognized?
The sale is split into two promises: the goods and the points. The goods share is recognized at once. The points share becomes deferred revenue and is recognized when points are redeemed, with expected breakage recognized in proportion to redemptions.
The standard’s own Example 52 shows the size of the effect. Customers buy $100,000 of products and earn 10,000 points worth $1 each, and 9,500 are expected to be redeemed. So $91,324 goes to the products and $8,676 to the points. After 4,500 points are redeemed, $4,110 of points revenue is recognized and a $4,566 liability remains.
Real filings work the same way. Starbucks defers revenue for the Stars members earn toward free products and records a liability for them. Delta Air Lines defers revenue for miles when earned and recognizes it as miles are redeemed and travel is provided.
How are points sold to partners recognized?
A payment from a partner, such as a co-brand card issuer, often covers several things at once. Delta allocates what American Express pays across award travel, baggage fee waivers, lounge access, priority boarding and use of its brand, based on relative selling prices. Each part follows its own timing: the award travel share is deferred until miles are redeemed and travel is provided, while the remainder, primarily brand value, is recorded as miles are delivered. Recording the whole payment as revenue when cash arrives would overstate current results.
What program decisions affect revenue timing?
- The value assigned to a point, which sets how much of each sale is deferred.
- Expiry rules, which change when points stop being owed.
- The breakage estimate, which sets how much deferred revenue is released without a redemption.
- Reward prices, which can change the value of a point.
A hypothetical example: if a $50 purchase earns points valued at $2 on their own, about $1.92 of the price is deferred. Halve the point value and about $0.98 is deferred, so more revenue lands today with no change in what the member bought. That is why finance should review changes to earn rates, reward prices, expiry or partner terms before launch.