Customer Loyalty Program

Measurement
An entity shall account for the award credits as a separately component of the initial sale transaction.
The fair value of the consideration received with respect to the initial sale shall be allocated between the
award credits and the sale based on relative stand-alone selling price.
The stand-alone selling price is the price which an entity would sell a promised goods or services
separately to a customer.

Recognition
The consideration allocated to the award credits is initially recognized as deferred revenue and
subsequently recognized as revenue when the award credits are redeemed.
The amount of revenue recognized shall be based on the number of award credits that have been
redeemed relative to the total number expected to be redeemed.
The estimated redemption rate is assessed each period. Changes in the total number expected to be
redeemed do not affect the total consideration for the award credits. Instead, the changes in the total
number of award credits expected to be redeemed shall be reflected in the amount of revenue recognized
in the current and future periods.

Illustration – Customer loyalty program (points redeemable by the entity itself)

Erika company operates a customer loyalty program. The entity grants loyalty points for goods purchased.
The loyalty points can be used by the customer in exchange for goods of the entity. The points have no
expiry date.
During 2021, the entity issued 50,000 award credits and expected that 80% of these awards shall be
redeemed.
The stand-alone selling price of the award credits granted is reliably measured at P1,000,000. In 2021, the
entity sold goods to customers for a total consideration of P7,000,000 based on stand-alone selling price.
The award credits redeemed and the total award credits expected to be redeemed each year are:
Redeemed Expected to be redeemed
2021 15,000 80%
2022 7,950 85%
2023 2,550 85%
2024 15,000 90%
 Stand-alone price Allocated price
Product sold 7,000,000 7/8 6,125,000
Points 1,000,000 1/8 875,000
Total 8,000,000 7,000,000

2021
To record the initial sale
Cash 7,000,000
Sales 6,125,000
Deferred Revenue 875,000

To record the redemption of 15,000 points

Deferred revenue 328,125
Sales 328,125
(15,000/40,000 x875,000)

2022
To record the redemption of 7,950 points
Deferred revenue 144,375
Sales 144,375
Points redeemed in 2021 15,000
Points redeemed in 2022 7,950
Total points 22,950

Cumulative revenue in 2022 472,500

(22,950/42,500x875,000)
Recognized in 2021 328,125
Revenue in 2022 144,375

2023
To record the redemption of 2,550 points
Points redeemed in 2021 15,000
Points redeemed in 2022 7,950
Points redeemed in 2023 2,550
Total points 25,500
Cumulative revenue in 2023 525,000
(25,500/42500x875,000)
Recognized in 2021 and 2022 472,500
Revenue in 2023 52,500

Deferred revenue 52,500

Sales 52,500

2024
To record the redemption of 15,000 points

Points redeemed in 2021 15,000

Points redeemed in 2022 7,950
Points redeemed in 2023 2,550
Points redeemed in 2024 15,000
Total points 40,500

Cumulative revenue in 2024 787,500

(40,500/45,000x875,000)
Recognized in 2021 -2023 525,000
Revenue in 2024 262,500

Deferred revenue 262,500

Sales 262,500

Total Deferred Revenue- 875,000

Revenue from redeemed points 787,500
Deferred Revenue-2024 87,500

Illustration – Customer loyalty program operated by a third party

Entity A takes part in a customer loyalty program operated by a large electronics retailer (Entity X). For
every P100 worth of purchases, a customer receives 5 loyalty points. These points can be spent on
purchases from Entity X only and each point can be spent on P1 worth of purchases. Entity A estimates the
stand-alone selling price of one point to be P0.9. For each point transferred to a customer, Entity A pays
Entity X P0.7.
During year 20X1, Entity A sells products for P100 million. Therefore, 5 million points are awarded to
customers.

Stand -alone price Fraction Allocated Price

Products 100,000,000 100M/104.5M 95,693,780
Points 4,500,000 4.5M/104.5 4,306,220
Total 104,500,000 100,000,000

To record the initial sale

Cash 100,000,000
Sales 95,693,780
Revenue from points 4,306,220

To record payment to entity X

Loyalty program expense 3,500,000
Cash 3,500,000
(5M points xP0.7)

Revenue from points 4,306,220

Loyalty program expense 3,500,000
Net revenue from points 806,220