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com/us/insurance

New Revenue
Recognition Rules
How will they affect
loyalty programs?
In May 2014, the U.S. Financial Accounting Standards The goal of the joint project was to improve financial
Board (FASB) and the International Accounting reporting by creating common revenue recognition
Standards Board (IASB) jointly issued a converged guidance for U.S. GAAP and IFRS that clarifies the
standard on revenue recognition. Almost all revenue- principles for recognizing revenue and that can be
generating entities (e.g., public, non-public, not-for- applied consistently across various transactions,
profit) will be affected to some extent by the new industries, and capital markets. With the FASB’s
standard. The accounting for loyalty programs, issuance of Accounting Standards Update
particularly for U.S. GAAP preparers, is likely to be one (ASU) 2014-09, Revenue from Contracts with
area of significant change. The new guidance will result Customers (Topic 606), and the IASB’s issuance of
in greater deferral of revenues, changes in balance IFRS 15, Revenue from Contracts with Customers,
sheet liabilities, and additional financial statement such standardization should promote better
disclosures. Companies will need to account for points understanding and comparability across these
issued as a separate obligation, which involves dimensions for financial statement users.
developing more robust models to enable management
to comply with these new accounting requirements. An essential concept embedded in the new standard is
Specifically, companies will need to thoroughly the alignment of revenue recognition with the
consider concepts such as redemption curves, breakage satisfaction of performance obligations. It requires that
estimates, and value of a point. all the obligations of a contract with a customer
(verbal, written, or implied) be separately identified to
This paper provides an overview of the accounting the extent they are distinct, with the price paid by the
requirements in the new revenue recognition standard customer allocated to each of those performance
for loyalty programs. Although the effective date of the obligations. Revenue is then recognized when each of
new revenue recognition standard is a couple of years the performance obligations is transferred to the
away, the efforts required to ensure compliance for customer.
loyalty programs may be significant and will likely
impact many systems, processes, and policies. Depending on the initial goods and services being
provided, the new guidance may or may not change the
General background pattern of revenue recognition. For normal product
sales in the retail and consumer markets for example,
Since 2002, the FASB and IASB have been working on the timing of revenue recognition might not change
a joint project to develop a new principles-based significantly under the new standard as the transfer of
revenue standard that applies across all industries. The control of the goods to the customer typically occurs at
Boards have long recognized that current revenue the same time as (or very close to) payment. Whatever
recognition requirements in generally accepted the initial good or services being provided though, the
accounting principles in the United States (U.S. GAAP) consideration allocated to loyalty programs needs to be
differ from those in International Financial Reporting deferred as it relates to future products and/or services
Standards (IFRS), and both sets of requirements could that will be purchased with an accumulation of earned
be improved. While U.S. GAAP includes broad revenue credits or points.
recognition concepts, there are over 200 industry-
specific and prescriptive guidelines resulting in Another important concept included in the new
different accounting for economically similar standard is the requirement to use a “relative
transactions. In contrast, IFRS has been criticized for standalone selling price” to allocate the consideration
not providing sufficient detail, which makes it difficult to the loyalty program awards/points.
to apply the current guidance to complex transactions
and to multiple-element arrangements.

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Current U.S. GAAP accounting for loyalty Aside from the different revenue recognition
programs methodologies, both approaches establish a liability on
the balance sheet – "program liability" under the
Under current U.S. GAAP, revenue recognition is incremental cost approach or "unearned program
broadly addressed under Staff Accounting Bulletin revenue" under the deferred revenue model – between
SAB 101: New Revenue Recognition Guidelines as well the time points are earned by customers and the time
as SAB 104: Revenue Recognition. Under these points are redeemed, forfeited, or expired. The liability
guidelines, recognition of revenue is linked is established net of breakage under both approaches.
intrinsically to the completion of the earnings process The amount of the liability, and therefore the impact
as well as the transfer of the risks and rewards of on a company's net income, is often larger under the
ownership to the end customer. As there were no deferred revenue approach as the revenue associated
specific rules for loyalty programs, FASB’s Emerging with rewards is typically greater than its costs,
Issues Task Force (EITF) offered additional guidance particularly if only incremental costs are considered.
with Issue No. 00-22, Accounting for “Points” and
Certain Other Time-Based or Volume-Based Sales The new revenue standard is more consistent with the
Incentive Offers, and Offers for Free Products or deferred revenue model. It will likely result in later
Services to Be Delivered in the Future. A related EITF revenue recognition for a portion of the transaction
Issue (No. 01-9, Accounting for Consideration Given price for those currently using an incremental cost
by a Vendor to a Customer (Including a Reseller of the model – which happens to be the more prevalent
Vendor’s Products) also provides guidance for GAAP practice in the United States. In addition, the
recognition of revenue for customer loyalty programs. transaction price allocated to the loyalty points could
Under these guidelines, two dominant accounting be different using the relative standalone selling price
approaches have emerged in the U.S. to recognize and concept being introduced in the new standard, as
measure loyalty program revenues and costs. explained later in this paper.

 Incremental Cost Model. Under this approach, a Current IFRS accounting for loyalty programs
company immediately recognizes revenue at the
time of the qualifying purchase (i.e., when points For companies accounting under international rather
are earned). At the same time, the company the U.S. GAAP standards, IFRIC 13 was issued in 2007
records a liability for the cost associated with the (effective July 1, 2008) to provide more specific
company's future obligation to its customers. guidance and to bring greater consistency regarding
Divergent practices have emerged as to how this
cost is determined, ranging from incremental to the treatment of loyalty program liabilities. The two
full-cost estimates. The program liability is major concepts underlying the application of IFRIC 13
reduced for customer's redemption, forfeiture, or to loyalty program accounting are:
expiration of accrued awards/points.
 The issuance of credits or points must be
 Deferred Revenue or Multiple-Element Model. accounted for as a separate component of the sale
Under this alternative approach, the issuance of
(similar to the performance obligation concept in
points is viewed as a separate component of a sale.
Therefore, a company defers the recognition of a the new standard). In essence, this requires a
portion of its revenue, which is directly related to deferred revenue approach, whereby the income
the earning of loyalty points, to a future period in statement immediately recognizes the portion of
which the customer either redeems the revenue related to the sale of a good or service and
awards/points or they are subject to forfeiture or defers the remaining revenue allocable to the value
expiration. This approach often uses a fair value of loyalty points. This deferred revenue is
approach (versus incremental cost) to calculate the
recognized when the loyalty points are redeemed,
deferral amount.
forfeited, or have expired.

 The process of calculating the amount of deferred

revenue when issuing points must be based upon
the fair value of those points to the customer. This
guidance means that a company must defer the

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 value of the points according to the value that Because IFRS 15, Revenue from Contracts with
customers put upon them, using either the fair Customers, is generally aligned with the principles-
value (a residual method) or relative fair value of based concepts underlying IFRIC 13, transition to the
the points. new standard for loyalty programs under IFRS will not
be as dramatic as it will be for some of the programs
Although similar to the deferred revenue alternative currently following U.S. GAAP. However, there could
sometimes used under U.S. GAAP, IFRIC 13 be differences in the allocation of the transaction price
additionally requires the use of a “fair value” concept in to the loyalty component based upon the “relative
valuing loyalty awards/points. standalone selling price” compared to the guidance
currently provided under IFRIC 13. For example, the
use of a “residual value” approach allowed under
IFRIC 13 would be severely limited under IFRS 15.

New model Current U.S. GAAP Current IFRS

An option to acquire additional goods or There is divergence in practice in U.S. Loyalty programs are accounted for
services gives rise to a separate GAAP in the accounting for loyalty as multiple-element arrangements.
performance obligation if the option programs. Two models commonly Some revenue, based on the fair
provides a material right that the customer followed are an incremental cost accrual value of award credits, is deferred
would not receive without entering into model and a deferred revenue model. and recognized when the awards are
that contract. The revenue standard Under the incremental cost model, redeemed or expire.
requires management to estimate the revenue is typically recognized at the
transaction price to be allocated to the time of the initial sale and an accrual is Revenue is allocated between the
separate performance obligations and to made for the expected costs of satisfying good or service sold and the award
recognize a contract liability for the the awards credits. The multiple-element credits, taking into consideration the
performance obligations that will be model results in the transaction price fair value of the award credits to the
satisfied in the future. being allocated to the products or customer. The assessment of fair
services sold and to the award credits, value includes consideration of
The customer is paying for the future with revenue recognized as each discounts available to other buyers
goods or services to be received when the element is delivered. The incremental absent entering into the initial
award credits are issued in conjunction cost model is more prevalent in practice. purchase transaction and expected
with a current sale. The entity recognizes forfeitures.
revenue for the option when those future
goods or services are transferred to the
customer or when the option expires.
Potential impact
The new revenue standard is consistent with the deferred revenue or multiple-element model currently required under IFRS,
so may have a greater impact on U.S. GAAP reporters. The transaction price is allocated between the product and the loyalty
reward performance obligations based on a relative standalone selling price. The amount allocated to the loyalty rewards is
recognized as a contract liability and revenue is recognized when the rewards are redeemed or expire. This will generally
result in later revenue recognition for a portion of the transaction price for those currently using an incremental cost model.

5-Step process required by the new standard

Identify the
Identify the contract Determine the Allocate the
performance Recognize revenue
with the customer transaction price transaction price
obligations

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The core principle of the new revenue recognition agreement), the banks’ revenue actually comes from
guidance is that an entity should recognize revenue to the merchants who separately pay a fee to the bank
depict the transfer of goods or services to a customer at when a payment is made with a credit card (card
an amount that reflects the consideration to which the acceptance agreements). This issue was addressed by
entity expects to be entitled in exchange for those the Transition Resource Group (“TRG”) from a U.S.
goods or services. GAAP perspective with the consensus being that many
of these arrangements would be outside the scope of
In order to achieve this matching of revenue with the ASC 606. Specific guidance on credit card fees exists in
transfer of promised goods or services to customers, an ASC 310 and the TRG concluded that if the fees are
entity should apply the following five steps. outside the scope of ASC 606, any associated loyalty
points would also be outside the scope of ASC 606.
It should be noted that while the revenue recognition
standard prescribes accounting for an individual Under IFRS however, no separate guidance exists in
respect of credit card fees so we expect banks to
contract with a customer, it allows for application of
continue to defer revenue in respect of credit card
the guidance to a portfolio of contracts (or
performance obligations) with similar characteristics if loyalty programs.
the entity reasonably expects that the effects on the Step 2: Identify the performance obligations in
financial statements of applying this guidance to the the contract
portfolio would not differ materially from applying this
guidance to the individual contracts (or performance A performance obligation is a promise in a contract
obligations) within that portfolio. When accounting for with a customer to transfer a good or service to the
a portfolio, an entity shall use estimates and customer. If an entity promises in a contract to transfer
assumptions that reflect the size and composition of a bundle of goods or services to the customer, the
the portfolio. This portfolio concept would likely apply entity should account for each promised good or
to loyalty programs. service as a separate performance obligation if it is
distinct.
Step 1: Identify the contract(s) with a
Loyalty programs typically result in a transaction
customer
whereby a customer buys goods or services and is also
Because the new standard applies only to contracts entitled to customer award credits. The customer can
with customers, the first step in the model is to redeem the credits for awards such as free or
determine if a contract exist and whether that contract discounted goods or services (e.g., hotel nights, flights,
is with a customer. A customer is a party that has retail goods, etc.). The award credits are a distinct
contracted with an entity to obtain goods or services promise from the product or service initially purchased
that are an output of the entity’s ordinary activities in so represent a separate performance obligation.
exchange for consideration (i.e., payment). A contract
Step 3: Determine the transaction price
is an agreement between two or more parties that
creates enforceable rights and obligations. The transaction price is the amount of consideration
to which an entity expects to be entitled in exchange
In many loyalty programs, it is clear that a contract
for transferring promised goods or services to a
exists between an entity and its program members. In
customer. For loyalty programs, determining the
some situations involving more than two parties,
overall transaction price for the performance
however, it is less clear as to which counterparties are
obligations is relatively straightforward. Its allocation
“customers” and whether any performance obligations
to the performance obligations within the contract
exist. In fact, during the development of the new
(e.g., product and loyalty program awards) is more
standard there was considerable debate with financial
challenging, as discussed in the next step.
institutions about the implications for their credit card
reward programs which involve the financial Interestingly, loyalty programs often involve an
institution, the cardholder, and various merchants. implicit financing element, as the customer has paid in
Although the bank grants award credits to the advance for goods or services. For example, there may
cardholder based upon card usage (cardholder be a significant delay between the payment (earning of

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awards/points) and performance (award redemption). For many loyalty programs, the transaction price of the
With particular relevance to loyalty programs, initial good or service is likely to be directly observable
however, is a “practical expedient” – where an entity (i.e., the price paid by the member for a hotel room,
that is paid in advance for goods or services need not flight, etc.). However, the standalone selling price of
reflect the effects of the time value of money when the the loyalty awards might require some estimation
timing of transfer of those goods or services is at the (which could change over time) to consider potential
customer’s discretion. In such a case, it is understood customer discounts, breakage, variability/change in
that the main purpose of the loyalty program is not to costs, etc. Even when an entity sells points directly to
provide a financing element. customers for cash, these rarely represent a standalone
selling price. This is because points sold for cash are
Step 4: Allocate the transaction price to the typically intended to allow customers to top-up their
performance obligations in the contract balance to obtain their desired redemption, so they are
usually priced at a premium and volumes available for
To allocate an appropriate amount of consideration to sale are generally restricted.
each performance obligation, an entity must determine
the relative standalone selling price at contract In the allocation process, the sum of the standalone
inception of the distinct goods or services underlying selling prices for the promised goods or services almost
each performance obligation and allocate the always exceeds the contract’s total consideration,
transaction price in proportion to those standalone implying a discount is embedded in the arrangement
selling prices. A standalone selling price is defined as because customers who are loyalty program members
the price at which an entity would sell a promised good very rarely pay extra to obtain their points. The
or service separately to a customer. The best evidence discount should be allocated to the separate
of a standalone selling price is the observable price of a performance obligations based on relative standalone
good or service when the entity sells that good or selling prices, so that the discount is allocated
service separately in similar circumstances and to proportionately to all performance obligations.
similar customers. A contractually stated price or a list
price for a good or service may be (but shall not be Breakage
presumed to be) the standalone selling price of that
good or services. If a standalone selling price is not One very important aspect of determining the
directly observable, an entity can estimate it as an standalone selling price of loyalty program
amount that would result in the allocation of the awards/points is to consider the likelihood that the
transaction price meeting the same allocation objective option will be exercised or “cashed in.” In developing
after considering all information (including market the standalone selling price of loyalty program
conditions, entity-specific factors, and information awards/points, the standard indicates that it should
about the customer or class of customers) that is reflect “breakage,” that is, the proportion of the total
reasonably available to the entity. Suitable methods for earned points that will not be redeemed due to point
estimating the standalone selling price of a good or expiration, point balances below the minimum reward
service include, but are not limited to, the following: level, and dormant or cancelled members. Breakage
can be a significant component in the calculation of
 Adjusted market assessment approach, e.g., using program obligations and is often estimated on an
competitor pricing, adjusted to reflect an entity’s aggregate level using actuarial methods based upon
own costs and margins historical redemption patterns.
 Expected cost plus a margin approach Breakage is factored into the standalone selling price of
 Residual approach – the total transaction price less the points. The greater the expected breakage, the
the sum of the observable standalone selling prices lower the value of the points to the customer, which
of other goods or services. (This approach is only leads to more consideration being allocated to the
allowed, however, when the good or service has not initial goods or services. Anticipated breakage arising
previously been sold on a standalone basis or from points not expected to be utilized is recognized as
where the selling price is highly variable and not revenue in proportion to the pattern of rights exercised
discernible from past transactions.) by the customer provided that the entity can reliably
estimate breakage and pass the variable consideration
constraint.

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The assessment of breakage should be updated each Example 52 of FASB Topic 606, Revenue
reporting period. Changes in breakage estimates from Contracts with Customers
should be accounted for by way of a cumulative catch
up adjustment to revenue. An entity has a customer loyalty program that
rewards a customer with one customer loyalty point
Step 5: Recognize revenue when (as) the entity for every $10 of purchases. Each point is redeemable
satisfies a performance obligation for a $1 discount on any future purchases of the
entity’s products. During a reporting period,
An entity should recognize revenue when (or as) it customers purchase products for $100,000 and earn
satisfies a performance obligation by transferring a 10,000 points that are redeemable for future
promised good or service to a customer. In a loyalty purchases. The consideration owed by the customers
program, the majority of the revenue associated with is fixed, and the standalone selling price of the
the initial product purchased is recognized purchased products is $100,000. The entity expects
9,500 points to be redeemed. The entity estimates a
immediately, and the value of the loyal awards/points
standalone selling price of $0.95 per point (totaling
is deferred until redeemed, forfeited, or expired. $9,500) on the basis of the likelihood of redemption.
The example to the right, from FASB’s Topic 606, was The points provide a material right to customers that
created for Customer Loyalty Programs to illustrate the they would not receive without entering into a
five steps to conform to this standard. contract. Consequently, the entity concludes that the
promise to provide points to the customer is a
performance obligation. The entity allocates the
transaction price ($100,000) to the product and the
points of a relative standalone selling price basis
as follows:

Product: $91,324 [$100,000 x ($100,000

standalone selling price/$109,500)]

Points: $8,676 [$100,000 x ($9,500 standalone

selling price/$109,500)]

At the end of the first reporting period, 4,500 points

have been redeemed, and the entity continues to
expect 9,500 points to be redeemed in total. The
entity recognizes revenue for the loyalty points of
$4,110 [(4,500 points/9,500 points) x $8,676] and
recognizes a contract liability of $4,566 ($8,676 -
$4,110) for the unredeemed points at the end of the
first reporting period.

At the end of the second reporting period, 8,500

points have been redeemed cumulatively. The entity
updates its estimate of the points that will be
redeemed and now expects that 9,700 points will be
redeemed. The entity recognizes revenue for the loyal
points of $3,493 {[(8,500 total points
redeemed/9,700 total points expected to be
redeemed) x $8,676 initial allocation] - $4,110
recognized in the first reporting period}. The
contract liability balance is $1,073 ($8,676 initial
allocation - $7,603 of cumulative revenue
recognized).

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Principal vs. Agent Customer options – loyalty points
redeemable with another party
Determining whether an entity is either a principal or
A retailer offers a customer loyalty program in
agent in a loyalty program transaction is also
partnership with an airline that awards one air travel
important in determining the appropriate accounting. point for each dollar a customer spends on goods
An entity usually recognizes revenue on a gross basis if purchased from the retailer. Program members can
it is the principal in the arrangement and on a net basis redeem the points for air travel with the airline. The
if it is an agent. An entity is typically the principal in an transaction price allocated to each point based on its
arrangement if it obtains control of the goods or relative estimated standalone selling price is $0.01.
services of another party in advance of transferring The retailer pays the airline $0.009 for each point
redeemed effectively retaining a commission of
control of those goods or services to a customer. The
$0.001.
entity is an agent if its performance obligation is to
arrange for another party to provide goods or services. The retailer sells goods totaling $1 million and grants
one million points during the periods. The retailer
Points obligation resides with seller allocates $10,000 of the transaction price to the
points, calculated as the number of points issued
An entity that issues loyalty points that it is responsible (one million) multiplied by the allocated transaction
for satisfying needs to evaluate whether it is an agent price per point ($0.01).
or principal. Principals record gross revenue while
agents record only a net commission. Based on the The retailer concludes that it is an agent in this
transaction in accordance with the guidance in the
latest decisions by the Boards, the new guidance will
new revenue standard.
require entities to consider whether they are the
primary obligor, whether they bear inventory risk, and How should the Retailer account for points issued to
whether they have latitude to determine prices. its customers?
Analysis
Points obligation resides with another entity
The retailer measures its revenue as the commission
In other cases, a seller may issue another entity’s it retains for each point issued because it concluded
loyalty points as part of a sales transaction in return for that it is an agent in the transaction. The commission
paying the other entity a portion of the consideration it is $1,000, which is the difference between the
receives from the transaction. In this scenario the transaction price allocated to the points ($10,000)
and the $9,000 paid to the airline. The retailer will
seller is not responsible for providing redemptions and
recognize its commission when it transfers the points
its only obligation is to issue the points. Here the seller to the customer (upon purchase of goods from
is only acting as an agent of the entity who stands retailer) because the retailer has satisfied its
behind the points obligation, and the seller receives a performance obligation by transferring control of the
commission for issuing the points. The fair value of the air travel points to the customer.
points issued will typically be higher than the amount
of consideration passed on to the other entity, with the
difference representing the commission.

In practice, the seller usually satisfies its performance

obligation relating to the issuance of the points at the
same time as it provides the initial good or service to
the end customer. In this case the seller recognizes all
revenue on the same date and records the payment to
the other entity for the points issued as a deduction
from revenue.

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New disclosures requirements. The reqired disclosures are likely to
require entities to gather more disaggregated data than
The new revenue recognition standard requires may have been needed in the past.
additional qualitative and quantitative information
about loyalty programs regarding its contracts with Effective date and transition
customers and significant judgments and changes in
judgments. Some entities already include information Due to the pervasiveness of the standard and the
about their loyalty programs within their financial importance of reported revenues, the FASB and IASB
statement footnotes such as a description of the adopted a longer than typical transition period. Under
program, recent changes, accounting policy, deferred U.S. GAAP, public companies and non-public entities
income, and information about the movement in the will start applying the new revenue recognition rules in
number of points outstanding throughout the year. 2018 and 2019 respectively. U.S. GAAP reporters are
permitted to early adopt up to one year early. The
The new standard has extensive new disclosure revenue standard is effective for entities that report
requirements. The disclosures likely to be most under IFRS beginning in 2018. IFRS has permitted
applicable to entities with loyalty programs are: early adoption from the date that the standard was
issued.
 Detailed information as to how the loyalty points
liability has moved during the year. Quantitative The Boards also allowed two alternative methods for
information is required, so entities may determine the initial reporting under the revenue standard:
that the most appropriate way of complying with
this requirement is to reconcile the liability from 1. Full Retrospective Method – Retrospectively to
the opening to closing balance sheet carrying each prior reporting period presented, subject to
amounts.
certain practical expedients. For public
 In addition to the above, the standard specifically companies, this approach would require
requires information about how much revenue application of the new revenue recognition
recognized in a period was included within standard to all contracts after January 1, 2018,
deferred income at the previous year end, and the
restatement of all contracts in 2016 and 2017, and
amount of current year revenue that relates to
performance obligations satisfied in previous a cumulative adjustment (to opening retained
years. This latter requirement will be particularly earnings) shown as of January 1, 2016.
relevant where an entity makes revenue
adjustments due to changes in breakage estimates. 2. Modified Retrospective Method – Retrospectively
with the cumulative effect of initially applying the
 An estimate of the timing of satisfaction of the
revenue recognition standard recognized at the
loyalty points liability. This disclosure can be
either quantitative or qualitative. date of initial application. For public companies,
this approach would also require application of the
 A disaggregated analysis of revenue recognized new revenue recognition standard to all contracts
during the year. Many programs have a wide range open at January 1, 2018, with a cumulative
of redemption partners which may lead to
additional line items in this analysis. Entities are adjustment shown as of January 1, 2018; however,
also required to provide a qualitative description of it would not require restatement of 2016 and 2017
the items they have promised to transfer to satisfy figures. Companies taking this relief would also
their performance obligations, highlighting need to disclose the effect on 2018 figures of
arrangements in which they are an agent. applying the new revenue recognition standard for
 Information about the methods, inputs and each financial statement line item affected (i.e.
assumptions used for estimating the stand alone disclose 2018 revenue under old GAAP).
selling price of performance obligations (i.e. loyalty
points), and hence allocating the transaction price. If accurate and consistent trending data is important
over the years, the full retrospective approach might be
When designing systems and processes to handle the the preferred approach as prior years’ financials would
accounting model required by the new guidance, be presented on a consistent basis with the current
entities should also be mindful of the disclosure period.

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While the modified retrospective transition method is
intended to reduce the time and effort in transition for
preparers, its requirement to disclose the impact to
each financial statement line item effectively results in
an entity applying both the new revenue standard and
the previous revenue guidance in the year of initial
application.

A further complication of the modified retrospective

method is that the original text only permitted
contracts that were not complete from a revenue
accounting perspective under previous GAAP to be
adjusted on transition. This would have resulted in
entities who previously accounted for loyalty programs
as cost accruals under U.S. GAAP being unable to
adjust the cost accrual to a revenue deferral on
transition, because under ASC 605 all revenue had
been recognized. Consequently, old points would have
remained cost accruals with new points issued being
revenue deferrals. The FASB has decided to amend the
standard to give entities the option to consider all
revenue contracts at transition under the modified
retrospective approach, not just those that were
incomplete under previous GAAP. Failure to elect this
option though will leave entities accounting for legacy
points differently to new points resulting in confusion
as to whether redemptions satisfty the old cost accrual
or result in revenue recognition. This issue does not
arise under IFRS because IFRIC 13 already requires
revenue deferral so revenue contracts containing
unredeemed loyalty points are not complete under
previous IFRS guidance.

Regardless of which method is used, an entity needs to

perform the calculations in order to compute the
cumulative catch-up entries.

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Conclusion Contacts
Although the effective date of the new revenue For a more detailed discussion about revenue
recognition standard is a couple of years away (2018), recognition and analysis for loyalty programs, please
companies with significant loyalty programs may need contact:
to consider the impact of the new standard on their
processes soon as the efforts required to ensure Brian Jones
compliance for loyalty programs may be significant. In
Actuarial Principal
fact, depending on which transition rule is selected,
some information will need to be collected starting in 213-217-3407
2016. [email protected]

For many U.S. GAAP reporters, it is expected that the Brett Cohen
deferral of loyalty program revenue is likely to Accounting Services Group Partner
increase. Changes to this top-line metric for a company
973-236-7201
can affect many other financial and operational
[email protected]
elements (e.g., key performance indicators, profits for
distribution, liabilities, commissions, bonus plans, John Kryczka
income taxes, debt covenants, etc.) and may require Actuarial Managing Director
re-examination of certain agreements.
312-298-3746
Public companies need to begin communicating with [email protected]
analysts and shareholders about the potential impact Martin Menard
of the new authoritative accounting guidance that has
been issued but not yet implemented. Getting an early Actuarial Director
start on understanding and evaluating the impact of 312-298-6165
the new revenue recognition standard will greatly ease [email protected]
transition issues and allow management to be
Simon Whitehead
proactive with its program rather than reactive. For
example, it may identify prospective changes in the Accounting Services Group Senior Manager
structure or provisions of their loyalty programs.
973-236-4927
[email protected]

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