When customers acquire goods from a retailer, they are sometimes awarded with points or vouchers that can be used to obtain other goods or services from that retailer, or to receive a discount on the future purchase of goods or services.
Under IFRS 15, a loyalty/reward program creates a performance obligation, when it provides a material right to the customer; hence the seller will need to allocate a portion of the transaction price to the loyalty program.
Revenue is apportioned in accordance with the relative stand-alone selling prices of the items sold and will be recognized when the performance obligation is satisfied, which is normally when the loyalty points are redeemed or expire.
ABC Ltd has a loyalty program that rewards customers one point per $1 spent. Points are redeemable for $0,10 off future purchases.
ABC Ltd sells various products to Customer X for $2.000; therefore Customer X earns 2.000 points redeemable for $200 off future purchases. Based on past experience ABC Ltd expects redemption of 85% of the points granted.
Effectively ABC Ltd sold for $2.000, goods with a value of $2.000 and loyalty points with a value of $170 ($200 * 85%), meaning that a discount of $170 has been granted. Hence, the retailer would allocate the transaction price of $2.000 between the goods sold and loyalty points, based on the relative stand-alone selling prices as follows:
|Goods||$2.000||2000/2170 = 92%||-$158||$1.842|
|Loyalty points||$170||170/2170 = 8%||-$12||$158|
The initial journal entry required is:
DR Cash $2.000
CR Revenue $1.842
CR Contract Liability $158
Continuing from the previous example, let’s say that Customer X redeems 1.000 points (50% of the total points awarded).
The journal entry required is:
Dr Contract Liability $79
CR Revenue $79 ($158 * 50%)