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% | -$157 | $1.843 |
| Loyalty points | $170 | 170/2170 = 8% | -$13 | $157 |
| TOTAL | $2.170 | -$170 | $2.000 |
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I have a question about this – let’s say that a customer receives one (1) reward point for every $50 spent, and after 100 points are collected, they can redeem a good that is normally worth $200 for free. The rewards points don’t expire, and customers only redeem them about 25% of the time. How would this be accounted for under IFRS 15? Can you provide journal entries as a visual? Thank you!
Hello Teddy. Based on the numbers you provided, the ratios to be used for future transactions are:
• Goods – 5000/5050 = 99%
• Loyalty points – 50/5050= 1%
Basically what we are saying is that if a customer spends $5.000 he will get goods with a value of $5.000 plus 100 points with a value of $50 (since, only 25% is expected to be redeemed the value allocated to the loyalty points is $200 * 25% = $50).
Now, let’s assume that a customer spends $20.000 on various goods. The double entry is as follows:
DR Cash $20.000
CR Revenue $19.800 (99%)
CR Contract Liability $200 (1%)
The $200 will be recognized as Revenue when the loyalty points will be redeemed in the future.
Hi there,
Thank you for responding. I’m still quite confused. If spending $50 gets you only one point, and you have to spend 100 points to get the free good, how does this work out to spending $5 and receiving goods with a value of $5 plus 100 points? If you could please explain further that would be helpful.
Teddy
Each point has a value and this value should be reflected in each and every relevant journal entry.
You mentioned the word “free good”. There is no such thing as “free” in accounting. The customer is in effect prepaying for the right to get the future “free goods”.
Therefore, in essence each $1 spent by a customer should be split as follows:
• 99% for the goods bought now
• 1% for the right to get the future “free goods”
This accounting treatment is based on the accruals/matching concept. This is one of the fundamental accounting principles; and it is the same concept which dictates the calculation of Cost of Sales (Opening Inventory + Purchases – Closing Inventory).
The matching concept says we have to match income with expenses. In other words, income and expenses from the same transaction should be recorded in the same period.
That is why we deduct (remove) from Cost of Sales the Closing Inventory.
Inventory = No sales = No income = No cost