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.
Example 1
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:
| Stand-alone SP | % | Discount | Revenue |
| Goods | $2.000 | 2000/2170 = 92% | -$158 | $1.842 |
| Loyalty points | $170 | 170/2170 = 8% | -$12 | $158 |
| TOTAL | $2.170 | -$170 | $2.000 |
The initial journal entry required is:
DR Cash $2.000
CR Revenue $1.842
CR Contract Liability $158
Example 2
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%)
