Brought on by a need to synchronize U.S. accounting standards with those of their international partners, ASC 606 and IFRS 15 have been in place since their roll-out in the opening months of 2018. These new revenue recognition standards, with their emphasis on upfront revenue deferral, have occasioned a challenging — and sometimes somewhat unclear — shift in protocol for how corporate accountants should deal with loyalty program liability.
In this article, we’ll discuss the changes affecting accounting for customer loyalty programs, and provide vital insights for ensuring that your department confronts incoming liabilities in a way that conforms to regulations, without sacrificing income.
Fortunately, it’s far from impossible for accounting teams to stay within the prescribed bounds of the new revenue accounting standards. After all, the international community has been operating by a similar set of prescriptions for years.
The principle change confronting accountants now is the fact that transactions can no longer be viewed as singular occurrences, but instead must be viewed as a multi-segmented, compound set of performance obligations. For each of these performance obligations, revenue cannot be logged until the obligation is satisfied, or its validity expires.
Moreover, when accounting for customer loyalty programs (GAAP), accountants must correctly anticipate how much revenue is necessary to absorb outstanding liabilities and defer the corresponding amount upfront. It’s critical that accounting teams use nuanced, accurate, and granular-level data sets when calculating loyalty program liability levels, as there can be severe and undesirable consequences for deferring too much, or too little, revenue.
Deferring the correct amount is key
Prior to the reinstatement of the new revenue recognition standards, companies could log revenue for goods and services enjoyed by loyalty program enrollees — even before having satisfied the rewards-related performance obligations that came bundled with their purchases.
Now, however, the rules have changed so that accounting departments are expected to preemptively defer enough revenue to cover outstanding loyalty program liability and recognize revenue upon the completion of its attached performance obligations.
How much companies defer makes a difference. If accountants defer too little, the company may find itself unable to satisfy its liability and may be forced to eventually restate its income. Conversely, if they defer too much, they risk creating pools of stagnant, “stuck” income.
The solution is to take advantage of precise, finely-tuned software solutions (including emerging technologies such as artificial intelligence) to correctly detect breakage rates from a constellation of customer data points.
The bottom line
While the rules may have changed, keeping pace with them is a matter of strategically leveraging loyalty program member data and correctly anticipating breakage rates.
Failure to invest in adequate breakage metrics will cost your company far more in revenue true-ups or stuck revenue. How will your accounting department attain the granular-level insights it needs to correctly forecast liability levels?