How are customer loyalty programs accounted for under IFRS 15, and how does the deferred revenue calculation work?

Customer loyalty programs are a classic application of the multiple performance obligation framework under IFRS 15 / ASC 606. The loyalty points earned by customers represent a material right — essentially a discount on future purchases that the customer would not receive without making the current purchase.

The Key Concept:

When a customer earns loyalty points with a purchase, the transaction has TWO performance obligations:

1. The product/service delivered today
2. The future discount (loyalty points)

The transaction price must be allocated between these obligations based on their relative standalone selling prices.

Step-by-Step — Falcon Airlines Loyalty Program:

Falcon Airlines sells a flight ticket for $800. The customer earns 2,000 loyalty miles. Based on historical redemption data:

• 1 mile has a standalone selling price of $0.012
• Expected redemption rate: 80% of miles earned

Step 1: Determine standalone selling prices

• Flight: $800 (but this is the total amount paid, so we need to consider the miles as part of the transaction)
• Miles: 2,000 × $0.012 =$24 (gross value) × 80% expected redemption = $19.20 (adjusted for breakage)

Step 2: Allocate transaction price

Total standalone selling prices = $800 +$19.20 = $819.20

Wait — the transaction price IS $800. The standalone selling prices are used for allocation only:

Allocated to flight = $800 × ($800 / $819.20) = **$781.25** Allocated to miles = $800 × ($19.20 / $819.20) = **$18.75**

Step 3: Revenue recognition

Performance Obligation	Revenue Timing	Amount
Flight	At departure (point in time)	$781.25
Loyalty miles	When miles redeemed or expire	$18.75 (deferred)

Journal Entry at Ticket Sale:

Account	Debit	Credit
Cash	$800.00
Revenue — Flight		$781.25
Contract Liability (Deferred Revenue)		$18.75

As Miles Are Redeemed:

If the customer redeems 1,500 of 2,000 miles (75% of expected 80% = 93.75% of expected redemptions):

Revenue recognized = $18.75 × (1,500 / 1,600) = **$17.58**

Loading diagram...

Breakage (Unredeemed Points):

Under IFRS 15, if the entity expects breakage (non-redemption), it can recognize the expected breakage amount proportionally as the other points are redeemed — rather than waiting until expiration.

Key Exam Points:

1. Loyalty points = separate performance obligation (material right)
2. Transaction price is allocated based on relative standalone selling prices
3. Deferred revenue is recognized as points are redeemed or as breakage is recognized proportionally
4. The standalone selling price of points reflects the expected redemption rate (probability-weighted)
5. The total revenue over the life of the program = $800 (same cash received)

Explore more revenue recognition in our CFA Level II FRA course.