Loyalty programs are they keys to the kingdom.
From a marketing perspective, loyalty programs are the best way to engage customers and build your brand. From a financial perspective, finance leaders must make sure their customer loyalty program makes sense and is sustainable.
Obviously, it’s crucial to follow new revenue recognition standards. Therefore, loyalty program finance and accounting leaders are well advised to use these guidelines to ensure they stay on top of the new standards and remain in compliance in the best way possible.
Step #1: Make Sure Your Records Are Up to Date, Accurate and Valid
Accuracy is the most important thing when it comes to accounting. That’s all there is to it. That’s why you must validate your data before you get to work on your loyalty program reporting. Make sure that each transactional data point matches with the total outstanding point balance (the figure used to calculate loyalty program liability).
More importantly, you should be on the lookout for new expiration rules. Why? Things like flash promos might increase point redemption while grace periods often reduce point expiration.
Step #2: Specific Point Earnings and Redemptions
In order to estimate loyalty program breakage accurately it’s good practice to allocate redemptions to actual points earned. FIFO (First In First Out) is the rule of thumb for allocating redemption. The points that were earned first but remain outstanding should be tied to point redemptions. Of course, this is not a hard standard, nor is it required. In fact, some accountants might find it a little inconvenient, especially if your expiration policy allows for variations by the point. Either way, it’s crucial that you allocate redemptions to specific points earned.
Step #3: Update Loyalty Program Accounts
Accountants need to record several accounting entries, including Points earned, Points redeemed, Points expired, and updated breakage estimates (see step #4). They also must make final adjustments such as updating deferred revenue accounts and balances with current forex rates.
Step #4: Update Fair Value Per Point And Breakage Estimates
Breakage refers to the percentage of loyalty program points or rewards that eventually go unredeemed. It’s a
metric used to calculate the liability of a loyalty program. If your breakage is undervalued, the amount of deferred revenue will be low. What can we conclude? The future loyalty program liability will increase.
The opposite is also true. Take initiatives to make sure your FVPP and breakage estimates are current and accurate. According to Kyros Insights, accurate breakage estimates require use of predictive actuarial models that make use of data science and artificial intelligence.
These actuarial models can help examine actual member behavior in contrast to forecasts… If used properly.
Step #5: Consult With An Actuary At All Costs
Internal and external auditors as well as the company’s CFO typically scrutinize all financial statements. If major discrepancies are discovered, watch out! Given that break estimates are prone to inaccuracies, you better bring in an actuary to have that second look.
Step #6: Prepare Relevant Financial Disclosures
Because ASC 606 and IFRS 15 are now in effect, the list of financial disclosures required has become much, much longer. Here’s a that might come in handy.
Step #7: Compare Progress to Forecast for the Year
Most of the first 6 steps have to do with loyalty program liability, but it’s important that you compare actual breakage, revenue, and transactions estimates to your financial plan for the year. This way, you’ll know if your loyalty program under-performed or over-performed in the course of the year.
Step #8: Reveal Ways to Optimize your Loyalty Program
Loyalty program reporting often reveals several different metrics and insights that can be leveraged to optimize for higher program performance.
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