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All You Need to Know About Customer Loyalty Program Accounting

 

Customer loyalty programs are an attractive option for retaining your customers — after all, who doesn’t like free stuff? Of course, these programs aren’t really free. Customers “purchase” and redeem loyalty points just like any other product or service, and these transactions need to be reflected in your financial statements. This is where loyalty program liability comes in.

Our Customer Loyalty Program Liability Basics video series has everything you need to know about loyalty program liability. After this series, you will know:

  • The definition of loyalty program liability
  • The implications it has for your business.
  • The values and equations you will need to calculate loyalty program liability
  • The processes you should follow to comply with accounting standards

 

What is Customer Loyalty Program Liability?

Customer loyalty programs are a multi-billion dollar global industry, but understanding the financial implications doesn’t have to be overwhelming. In our first video, we will cover the definition of loyalty program liability and the basics of when you should record it. We also introduce the key values you need to calculate to create accurate liability reports.

 

What You Need to Predict to Quantify the Program Liability

In order to quantify the program liability, you will need to make some educated predictions about how points will eventually be redeemed, how much each will cost, the fair value to the customer, and how much revenue you can recognize for each point. This lesson will cover each of these predictions in more detail so that can confidently quantify your program liability.

 

What is Breakage and Ultimate Redemption Rate?

In order to assess customer loyalty program liability, you will need to calculate your program’s ultimate redemption rate (URR). This rate helps you estimate how many points will ultimately be redeemed under a number of conditions. In this lesson, we'll introduce the concept of URR and how it relates to breakage.

 

The Three Different Types of URR

URR on earned points, URR on outstanding points, and current month URR are three very important concepts to understand for proper accounting for loyalty programs. We will review the definitions of all three, and provide an example calculation of how to determine the impact of URR on your business.

 

What is Cost Per Point and Fair Value per Point?

Cost Per Point (CPP) and Fair Value Per Point (FVPP) are two calculations that help you pinpoint the exact financial liability of your loyalty program. This lesson will teach you how to calculate each value — including the estimates you will need to make — as well as the key differences between the two.

 

What are the Relevant Accounting Standards for Customer Loyalty Programs?

The accounting standards that apply to your program liability will vary depending on your jurisdiction. These standards dictate how you should book the liability as well as defer and recognize loyalty program revenue. In this video, you will learn which standards apply to you, how to allocate your revenue accordingly, and when you can release your loyalty program revenue.

 

What are the Accounting Entries to Book a Loyalty Program Liability?

In addition to the values referenced earlier in this series (URR, CPP, and FVPP), companies must calculate their revenue recognition rate each month. This value describes how much revenue can be recognized when each point is redeemed. This lesson covers how to calculate revenue recognition rate, and takes a deeper look at all the monthly accounting entries needed to book the liability.

 

What is Accounting Liability vs. Economic Liability?

You might not know that the liability on your balance sheet doesn't actually reflect the cost of fulfilling future redemptions. There is a profit margin baked into the liability, which means you're likely to recognize a profit each time a redemption happens if your underlying estimates were accurate. The final lesson of this course dives into the important distinction between accounting liability and economic liability so that you can be certain that you'll generate profit when redemptions occur.

 

Ready to dive in? Click below to start the first KYROS Academy course, An Introduction to Accounting for Customer Loyalty Programs.

 

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Len Llaguno
By Len Llaguno
Founder and managing partner of KYROS Insights. I'm an analytics nerd and recovering actuary. I use machine learning to help loyalty programs predict member behavior so they can identify their future best customers, and recognize and reward them today.

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