ASC 606 is the US accounting standard governing how companies recognize revenue from contracts with customers. It matters to a loyalty program because the points a member earns are usually treated as something the brand still owes. So part of the original sale cannot be recognized as revenue until those points are redeemed or they expire.
When a member buys something and earns points, ASC 606 generally treats those points as a material right, a separate performance obligation sitting alongside the product itself. The transaction price is allocated between the two based on their standalone selling prices, with the points valued using the expected redemption rate.
The portion allocated to points is deferred. It sits on the balance sheet as a liability rather than being recognized at the point of sale, and is released into revenue as members redeem, or when redemption becomes remote.
Remote is the accounting term for the point where the brand concludes those points will almost certainly never be used.
A $100 purchase earns points estimated to be worth $5. Roughly $95 is recognized at the sale, roughly $5 is deferred until those points are redeemed or expire.
Breakage is the term for points that are issued and never redeemed. Where a brand can estimate breakage reliably, it recognizes that revenue in proportion to actual redemptions rather than waiting for expiration. Where it cannot, the revenue waits until the likelihood of redemption becomes remote.
IFRS 15 is the international equivalent and works on the same principle.
Two reasons a marketing leader should care about a standard that belongs to finance.
It determines the number finance sees. A program that issues points generously defers more revenue, so reported revenue in that quarter may look lower. The money is not gone. It is just recognized in a later period, when members redeem or breakage is recognized. If finance discovers that at year-end close rather than when the program is designed, the program takes the blame for what is really an accounting effect.
It makes earn and redemption design a finance conversation. Earn rate, expiration rules and redemption thresholds all move the liability. A program designed without that input can create a balance-sheet item the business had not planned for.
A brand launches a program issuing points worth roughly 3% of each sale. Finance defers 3% of member revenue accordingly. A year in, the redemption rate settles well below forecast, the breakage estimate is revised, and part of the deferred balance releases into revenue. Neither movement reflects a change in trading. Both are accounting consequences of how the program was designed.
Treating points liability solely as a marketing metric. It is a financial statement item with audit consequences, and it is not marketing’s to manage. The mistake runs the other way too. Setting earn rates and expiration rules without aligning finance, and discovering the effect at year end.
This entry explains how the standard is generally applied. It is not accounting advice, treatment varies by program design and by auditor, and any brand setting up or changing a program should take this to its own finance team.
Both, in sequence. The portion of a sale allocated to points is a liability when the points are earned, and becomes revenue when they are redeemed or expire.
No, it defers part of it. The revenue is not lost. It is recognized later when members redeem or when breakage is recognized.
Points that are issued and never redeemed. Where a brand can estimate breakage reliably, it recognizes that revenue in proportion to actual redemptions rather than waiting for the points to expire.
Generally yes, where points are earned through purchases, because the points are a right granted as part of that transaction. Points issued with no purchase attached, such as a sign-up bonus, are treated differently.
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