The Loyal Millionaire

Loyalty rewards programmes are a common offering of banks these days aimed at rewarding their customers. The points are usually in the form of digital or virtual currency. The ‘currency’ is earned when purchases are made with a qualifying bank card; these can be converted to cash, make donations or used to make purchases at any of the bank’s partners, entities ranging from groceries to clothing, petrol to travel.

Millionaire’s loyalty points earned can either be converted to cash, or used to make purchases at qualifying stores. Millionaire’s has earned it. It’s an asset right?

While there is plenty of guidance how to account for loyalty points as the provider (recognising the revenue and liability), there isn’t much that talks to what entities should do when they earn them.

So, is it an asset?

An asset is defined as ‘a present economic resource controlled by the entity as a result of past events’. An economic resource is ‘a right that has the potential to produce economic benefits’ [The Conceptual Framework for Financial Reporting]. Loyalty points have the potential to save the company money, as they can be used to pay for goods and services, effectively reducing the amount the company would otherwise have had to pay, this represents an economic resource. The company can control the loyalty points as they can choose to make purchases with them, convert them to cash, save or donate them. [The Conceptual Framework for Financial Reporting]

Loyalty points do meet the definition of an asset. What type of asset is it though? It’s not a tangible asset, as it's not physical. Is this cash and cash equivalents, a type of financial asset, or an intangible asset?

1. Cash and cash equivalents

At first, it might appear that loyalty points should be accounted for as cash because they are a form of digital currency. However, loyalty points cannot be considered equivalent to cash (currency) as defined in IAS 7 and IAS 32 (IFRS For SMEs section 7) because they cannot readily be exchanged for any good or service. Although a number of entities may accept the loyalty points as payment, these are specifically negotiated partnerships with the bank, the points are not yet widely accepted as a medium of exchange and do not represent legal tender, i.e. while Millionaire’s could possibly buy tickets to fly to Hong Kong with them through a specific airline, it would not be able to buy McDonald’s burgers for the office staff.

IAS 7 (IFRS For SMEs section 7) defines cash equivalents as ‘short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value’. Loyalty points cannot be classified as cash equivalents because they cannot be readily convertible to cash. The bank must approve the conversion and it is usually only in tranches, i.e. 250 points for R10. If the company has 300 points the additional 50 cannot be converted. Therefore, it does not appear that digital currencies represent cash or cash equivalents that can be accounted for in accordance with IAS 7 (IFRS For SMEs section 7.

2. Financial asset

Loyalty points can be recognised as a financial asset if they meet the definition of a financial instrument (i.e. they represent cash, an equity interest in an entity, or a contract establishing a right or obligation to receive cash or another financial instrument). Loyalty points are not a debt security, nor an equity security because they do not represent an ownership interest in an entity, however, if they are convertible to cash, they could represent a contract establishing a right or obligation to receive cash. Therefore, loyalty points may be accounted for as financial assets, you may however, need to check the fine print.

3. Intangible asset

Another option could be recognising the (loyalty) points as intangible assets. An intangible asset is ‘an identifiable non-monetary asset without physical substance’. Loyalty points are identifiable as they arise from contractual rights agreed upon between the bank and its customers.

The loyalty points have no physical substance; they only exist virtually. However, they may be monetary assets (IAS 38 defines monetary assets as ‘money held and assets to be received in fixed or determinable amounts of money’), it depends on the terms and conditions of the loyalty program.

A loyalty points enthusiast described loyalty points as the ‘fairy godmothers of the consumer world’ - they magically transform everyday purchases into glittering rewards. So, next time you swipe that card or click 'buy now,' remember, you're not just spending, you're investing in your own happily ever after with discounts, freebies, and perks galore. Whether you can recognise them or not will be dependent on the specific agreement with the bank. Keep racking up those points, and who knows, maybe one day, you will be the Loyal Millionaire!

29 January 2024