What is Customer Loyalty Programs?
Customer loyalty programs are arrangements in which a business rewards customers for repeat purchases with points, miles, or discounts that can be redeemed later. Under IFRS 15, the loyalty rights are a separate performance obligation requiring revenue deferral.
How It Works
- Identify the loyalty rights granted with each sale.
- Estimate the stand-alone selling price of the loyalty rights based on redemption probabilities.
- Allocate part of the transaction price to a contract liability for the loyalty rights.
- Recognise the allocated amount as revenue when the loyalty rights are redeemed or expire.
- Update the estimate of breakage and redemption rates each period.
Saudi Context
Saudi retailers, telecom operators, and airlines run major loyalty programs (Mokafa’a, Qitaf, Tameezies). External auditors registered with SOCPA test the deferred revenue model annually, and ZATCA reviews the timing of revenue recognition during income tax and VAT audits.
Example
A coffee chain sells SAR 100 of products and grants 100 loyalty points worth SAR 5. SAR 95 is recognised as revenue immediately, and SAR 5 is deferred as a contract liability until the points are redeemed.