In plain words
A supermarket gives points with each purchase that customers can use later for a discount. The question is whether the whole sale price is revenue today. If the points give a material right, part of the price is allocated to them based on relative standalone selling prices, adjusted for expected unredeemed points. That part is held as a contract liability and becomes revenue when points are redeemed or expire.
Why it matters
Loyalty points are not a marketing cost - under IFRS 15 they are a distinct performance obligation whenever they grant a material right the customer would not get otherwise, so a slice of revenue that looks fully earned at the point of sale must instead sit on the balance sheet as a contract liability until points are redeemed, forfeited, or expire. Getting the breakage estimate wrong (or ignoring it) directly overstates or understates both revenue and the loyalty liability, and because loyalty balances often run for years, a systematic error compounds across many reporting periods before it is caught.
Diagnostic questions
Does the loyalty program grant a discount or benefit that customers without points could not otherwise get? Is there enough historical redemption data by tier/program to estimate breakage reliably? Is a portion of each qualifying sale currently being deferred as a contract liability rather than recognized in full at the point of sale?
Recognition
- Determine whether the program grants a material right: compare the discount/benefit available with points to what a customer could get without them; if there is no incremental benefit, there is no separate performance obligation.
- If a material right exists, identify the transaction price attributable to the overall sale (goods plus points) at contract inception.
- Allocate the transaction price between the goods and the points using their relative standalone selling prices - estimate the points' standalone selling price as the discount the customer will obtain, adjusted for the likelihood of redemption (expected breakage).
- Recognize the goods portion of revenue immediately on transfer of control of the purchased goods.
- Recognize the points portion as a contract liability at inception, then recognize it as revenue as points are redeemed (using a redemption ratio: points redeemed in the period / total points expected to be redeemed), or on forfeiture/expiry.
- Reassess the expected breakage rate at each reporting date as actual redemption data accumulates, and true up the contract liability and cumulative revenue recognized (a change in estimate, not a prior-period error).
Measurement
Measure the points' standalone selling price using the value of the discount the customer will obtain when redeeming, weighted by the expected probability of redemption (not the full face value of the discount, since not all points will be redeemed). Base the initial breakage estimate on the entity's own historical redemption curves by loyalty tier/program if available, or a reasonable proxy (industry data, pilot period) if the program is new; on subsequent measurement, remeasure the contract liability at each reporting date to reflect updated cumulative redemption experience - this typically increases recognized revenue if breakage turns out higher than originally estimated, or defers more revenue if lower.
Presentation & disclosure
Disclose: contract liability balance for unredeemed points at period end, presented within contract liabilities/deferred revenue; the amount of revenue recognized in the period that was included in the opening contract liability balance; the method and key assumptions used to estimate standalone selling price and breakage; significant judgments in determining whether the program grants a material right; a description of the loyalty program's terms (earn rate, redemption mechanics, expiry).
Common mistakes
- Expensing the cost of points as marketing/selling expense instead of deferring revenue as a contract liability
- recognizing 100% of sale revenue upfront and only reducing it when points are actually redeemed (ignoring the obligation that exists from day one)
- estimating breakage once at program launch and never updating it as real redemption data accumulates
- using the full discount face value as the points'
- standalone selling price without weighting for expected redemption probability
- failing to separately assess tiered-program upgrades (e.g., reaching a higher tier) as potentially creating an additional material right.
Simple example
A supermarket sells SAR 100 of groceries (cash sale) and grants loyalty points that can be redeemed for a SAR 5 discount on a future purchase. The standalone selling price of the goods is SAR 100; the points' standalone selling price, after weighting the SAR 5 discount by an 85% expected redemption probability, is SAR 4.25. Total standalone selling price = SAR 104.25. Allocated transaction price: goods = 100 x (100/104.25) = SAR 95.92; points = 100 x (4.25/104.25) = SAR 4.08. Journal entry at sale: Dr Cash 100.00 Cr Revenue - goods 95.92 Cr Contract liability - loyalty points 4.08 When the customer redeems the points in full on a later visit: Dr Contract liability - loyalty points 4.08 Cr Revenue - loyalty points 4.08 If, instead, redemption data later shows an actual/revised redemption rate of only 70% (higher breakage than assumed), the retailer recognizes the incremental breakage revenue on remaining unredeemed points at that date: Dr Contract liability - loyalty points [revised amount] Cr Revenue - breakage [revised amount]
Professional judgment
Two genuinely grey areas dominate: first, whether the program grants a 'material right' at all - if points merely mirror discounts available to any walk-in customer (e.g., a generic seasonal sale), there is arguably no separate performance obligation, but many loyalty programs sit in a judgmental middle ground (better-than-public but not dramatically so) where reasonable preparers can differ. Second, breakage estimation for new or redesigned programs is inherently uncertain - there is no redemption history to rely on, tiered programs create path-dependent redemption behavior (customers chase tier status rather than redeeming immediately), and coalition or multi-brand redemption options can change the standalone selling price estimate substantially. Preparers should document the basis for both judgments and revisit them at least annually.
Source basis
IFRS 15 · Revenue from Contracts with Customers
Paragraph references
Verified against the official standard texts used in the IFRS Expert skill.
Related issues
Educational and navigation content only. Not professional advice. Does not reproduce official IFRS/IAS text. Consult the authoritative standards and qualified professionals; professional judgment may still be required.