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Impact on Your Financials

  • Before you consider a LoyaltyShares option in your loyalty reward portfolio you should fully understand the impact it might have on your company’s financials.  When we were putting together this unique reward option we asked a third-party consultant – someone who provides outsourced CFO functions to many diverse clients – the following two big questions:

    Click the “+” sign to see the answers.

    Question # 1: What are the normal accounting treatments for Customer Loyalty Program Award Points?

    Both the United States Generally Accepted Account Practices (GAAP) and International Financial Reporting Interpretations Committee (IFRIC) identify and outline suggested accounting treatments for the value of awards earned in a customer loyalty program.

    For GAAP there are two options: 1.) Deferred Revenue and 2.) Incremental Cost

    For IFRIC there is only one option – Deferred Revenue.

    Under both approaches: The seller recognizes a liability on its balance sheet between the time points are granted to customers and the time the points are redeemed (or expire).

    The seller’s Net Income (NI) in the current period is reduced by the amount of the liability that the seller recognizes in the current period. The cumulative amount of revenue and expense recognized is the same in the long run.

    The only differences between the approaches are in the timing of revenue and expense recognition.

    Question # 2: What is the possible impact on the Balance Sheet and Income Statement for companies using LoyaltyShares as an award option?

    The shares could be either newly issued by the company or purchased on the open market by the Program Administrator. The impact to a specific company’s balance sheet will vary slightly depending on the source of stock. However, in all instances, in the long run – the use of customer loyalty points for stock in the company sponsoring the loyalty program will increase equity and decrease liabilities.

    If a company issues new shares they would debit an account such as Unearned Loyalty Program Revenue or Estimated Liability for Loyalty Program Redemption Cost and then have an offsetting credit for Equity.  If a company purchases its own shares on the open market, the shares are shown on its balance sheet as “Treasury Stock.”   When purchasing shares on the open market the accounting transaction would be to debit Treasury Stock and credit Cash.

    But don’t just take our word for it – check with your own finance people.  Each company has different goals and processes and you should  fully understand how this unique and exciting program option will work for your organization and within your loyalty program rules.  And if you have any thoughts on our analysis – feel free to shoot us a note and let us know – we’ll update our overview here.