US impact report on loyalty liability accounting
Colloquy has published a new review of the forthcoming update to the US 'Generally Accepted Accounting Principles' (GAAP), exploring what it means for companies accounting for breakage (issued loyalty rewards that go unredeemed).
In July 2008, companies outside the US and Canada adopted a new accounting standard that defined a consistent accounting treatment for loyalty programme liability accrual and the redemption of award credits and other incentives for companies following International Financial Reporting Standards (IFRS).
On 1st January 2011 Canada adopted the same policy and, as soon as July 2011, the US is expected to adopt the policy.
With there being an estimated 2 billion loyalty programme memberships in the US and US$48 billion in fair market value being issued in the form of points and miles each year in the US - and with one-third of those rewards never being redeemed - Colloquy explored how this change in accounting could affect loyalty programmes.
There will be three major changes that will apply under the new principles:
- Companies must account for the issuance of points as a separate component of the sale.
- As points are redeemed over time, the deferred revenue will be recognised as "performance of a service" that will have been completed.
- Deferred revenue will be calculated based upon the fair market value of the rewards (in retail - the face value of the retail gift certificate reward) less the expected breakage.
"The loyalty industry is now enormous," said Colloquy managing partner Kelly Hlavinka. "Consistent standards, more transparency and more uniformity in reporting are part of the maturation process."