How ASC 606 and IFRS 15 Will Change Accounting for Loyalty Programs
While the accounting field is rarely given credit for being a fast-paced, ever-changing environment, the truth is that accountants must frequently contend with evolving protocols and newly-implemented regulations.
At present, the latest changes in industry standards are the implementation of ASC 606 and IFRS 15. These new revenue recognition standards have redefined the way accountants must address loyalty program liability and transactions at large.
How exactly have the new revenue recognition standards changed accounting for loyalty programs? Primarily, it demands that accountants no longer view transactions as one, singular occurrence, but rather as a patchwork of related performance obligations which must all be individually satisfied before their revenue can be logged.
As a result, income received from loyalty program members cannot be fully logged until the performance obligations for their outstanding rewards are either fulfilled or reach their contractually-defined expiration.
This means that businesses must now defer revenue upfront to absorb the costs of their loyalty program liability.
Read on to uncover the ways in which accounting departments should address loyalty program liability in the face of ASC 606 and IFRS 15, and how to ensure your company defers the correct amount of revenue without incurring unwanted consequences.
The new revenue recognition standard
ASC 606 and IFRS 15 are the results of an effort to align U.S. standards with those of their international trading partners. When it comes to accounting for loyalty programs, the defining hallmark of the new revenue recognition standard is that it demands companies allot revenue upfront to absorb the incoming impact of outstanding loyalty.
Only when a company satisfies the attached performance obligation accompanying an outstanding loyalty program reward can they log the revenue for that transaction. As a result, it’s critical that companies know the exact scope of their loyalty program liability in order to set aside the correct amount to mitigate its impact.
If a company defers too little revenue, it will not have enough to cover the costs of rewards redemptions, which will lead to it needing to restate its income. Income restatements and revenue true-ups are highly undesirable and quickly erode away at investor confidence.
On the other hand, deferring too much revenue will cause revenue to stagnate and create what is known as “stuck revenue.”
The best defense that businesses have against either of these outcomes is to develop a robust method for accurately modeling breakage rates. In addition to knowing how many points will eventually be redeemed, companies can leverage loyalty program data to determine to the CPP, or cost per point, of redemptions. Using breakage and CPP values together, businesses can correctly identify how much they’ll need to set aside in order to negate the effects of loyalty program liability.
The bottom line
Failure to harness granular-level predictors of the behavioral patterns of individual members will leave your company under-equipped in its efforts to defer correct amounts of revenue and lead to the loss of its competitive edge against companies with well-developed breakage and CPP models.
Conversely, using data-driven tools such as advanced predictive analytics software and artificial intelligence solutions can provide you with the detailed insight you need to better understand member behavior, and thus, successfully adhere to the new standards.