New accounting rules will improve your loyalty books

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New accounting rules will improve your loyalty books
New accounting rules will improve your loyalty books

Reward certificates, rebates, points and miles are well- known marketing tactics that have become standard operating procedure in the competitive travel and 
hospitality field. So it's fitting that a set of standard practices governing how companies account for incentives is about to be adopted in the US. 

Until now, Generally Accepted Accounting Principles (GAAP) have not specifically outlined how points and rewards liability must be accounted for. However, recent activity by the Financial Accounting Standards Board (FASB) is expected to change that. Three changes will apply as soon as the third quarter of 2012.

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 recognized as "performance of a service" that will have been completed. The process of 
calculating the amount of deferred revenue when issuing points will be clearer as well. Deferred revenue will be calculated based upon the fair market value of the rewards (for example, in retail, the face value of a gift certificate reward) less the difference between points issued and points redeemed. 

The standard applies to any promotion, campaign or program in which a customer transaction can be tied to a 
future obligation. Travel companies could face the most pain in adopting the standards.

According to a forecast published in April by Colloquy and Swift Exchange, travel and hospitality companies issue more than $17 billion in perceived value of points and miles to consumers every year. More to the point, the travel and hospitality industry has the widest spread between the 
perceived value and actual cost of rewards. 

That same forecast estimates that 43% of the points issued each year are sold to third parties. Airlines will typically sell a mile to a co-brand bank partner or a car rental company for between 1 cent and 2 cents.

But with 2 billion memberships of loyalty programs and $48 billion annually in fair-market value in the form of points and miles across a wide range of industries in the US, a consistent standard, more transparency and more uniformity in reporting are part of the maturation process.

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