What Franchisees Need To Know About ASC 606: Accounting for Loyalty Programs

While ASC 606 can seem overwhelming, the purpose is quite simple. The goal of ASC 606 is to prevent the overstatement of revenue related to loyalty programs by calculating a deferred liability. This accounting standards update applies to both private and public companies, and if you can answer “yes” to the below two questions, you should keep reading.

  • Do you have GAAP audited financial statements?
  • Do you have a loyalty program that requires you to provide a good or service at a discount or free of charge?

If you answered yes, then ASC 606 applies to your business. To start, there are three keys terms you will want to familiarize yourself:

  1. Breakage: Is the percentage of loyalty points that you estimate will not be redeemed (This can also be looked as one less the redemption rate)
  2. Redemption Rate: Number of points redeemed / the number of points issued
  3. Deferred Revenue:ASC-1

In our experience, the period selected for arriving at the redemption rate is key. For instance, you may decide to look at the 2018 ending point balance and analyze current year activity in 2019 to calculate the redemption rate. Once you have made your initial adjustment, it would be wise to calculate the deferred revenue on a period or quarterly basis to ensure no surprises at year-end. This ASC has an impact on both the balance sheet and P&L.

When determining the estimated cost per point, be sure to consider discounts and be sure not to include $0 “sales” in your average. Therefore, you will want to look at both menu and promotional prices to arrive at a reasonable figure.  

Understanding the data and verifying validity is also important. On a go-forward basis, you will want to look at the points earned, redeemed and expired on a predetermined frequency to keep the breakage percentage up-to-date. Under accruing the liability could lead to undesirable adjustments at year-end.

Have questions about ASC 606? HORNE Franchise is here to help.