How do loyalty points affect revenue recognition?

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AcadiFi · Accepted Answer

Loyalty points that provide a material right to the customer are a separate performance obligation. You must allocate a portion of the transaction price to the points based on their standalone selling price (SSP) — typically the fair value of the expected redemption, adjusted for breakage. Example: Winterleaf Books sells $860,000 of books and awards 860,000 points (1 point per $1). Each point is redeemable for $0.08 of future purchases, and the company estimates 72% will be redeemed (breakage = 28%). SSP of points = 860,000 x $0.08 x 72% = $49,536. Allocation: book SSP $860,000 / total SSP $909,536 = 94.55%; points get 5.45%. Revenue recognized immediately = $860,000 x 94.55% = $813,130; deferred revenue for points = $46,870. As points are redeemed, deferred revenue is released proportionally. If 180,000 points are redeemed in Q2, release = $46,870 x (180,000 / 619,200 expected redemptions) = $13,626. Breakage estimates must be updated each period — increased breakage accelerates revenue. Compare this to loyalty discounts that wouldn't be available to other customers ('material right') vs marketing incentives (not a performance obligation).

How do loyalty points affect revenue recognition?

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