As more businesses introduce loyalty programs — especially in retail and ecommerce — a common question arises: how should loyalty points be accounted for?
There are two main approaches we see in practice. Some businesses treat loyalty points as a cost of sale, reducing revenue or increasing expenses when points are used. Others recognize them as a liability on the balance sheet until redemption. Both approaches aim to capture the economic impact of loyalty points, but the right treatment depends on your business model, jurisdiction, and accounting guidance.
Regardless of the method, loyalty points carry value. Whether they’re redeemed for discounts, shipping, or products, they reflect a benefit owed to the customer — and that may need to be accounted for.
Your financial advisor or accountant will be able to guide you to the right method. See some common methods below.
In some cases, businesses treat loyalty points as a discount — a cost of goods sold — rather than a separate liability. This method is often used when:
Here’s what that looks like in practice:
If a customer earns 100 points worth $10 off their next purchase, and uses it during checkout, the $10 is simply treated as a reduction in revenue or an increase in the cost of sale.
This approach simplifies accounting — especially when rewards are direct discounts and redemption is frequent — but it may not be appropriate for programs with delayed redemption, non-cash rewards, or uncertain redemption behavior.
Ultimately, whether points are treated as a cost of sale or a liability depends on the nature of your loyalty program and guidance from your accountant. Some businesses may even use a hybrid model depending on how rewards are structured.
From an accounting perspective, loyalty points are not “free”, they come with a cost that needs to be recognized on the balance sheet. This is because once points are issued, there’s an expectation they’ll be used. Until they are, they sit as a liability. The business owes the customer some form of benefit in the future, which affects the company’s financial position today.
Let’s say a customer earns 100 points that can be redeemed for a $10 discount. That $10 is an obligation — a cost the business will incur when the customer decides to redeem. Until that redemption happens, the $10 sits as a liability.
But not all redemptions are this simple. Points might be used to unlock something like free shipping, which varies depending on order size and destination. In those cases, the business needs to estimate the value of those rewards and record that estimate accordingly.
Not every point issued will be redeemed. Some customers let points expire, forget about them, or simply don’t use them. This “breakage” rate can reduce the total liability recorded. Businesses often estimate a redemption rate based on historical data to determine what portion of outstanding points are likely to be used.
For example, if your program historically sees 70% of points redeemed, you’d only account for 70% of the issued points as a liability, not 100%. But these assumptions must be reasonable, documented, and reviewed regularly.
How to find your points redemption rate in Marsello:
Head to Analytics > Loyalty Program in your Marsello dashboard. Choose your time period based on what’s going to give you the best estimate of future points redemption rate. Talk to your accountant or financial advisor about what will give you a reasonable estimate if you’ve had major changes in points redemption over time.
In this example, points redemption has consistently sat around the 67-69% mark, so their average point breakage rate would be 31-33%.
In accounting for loyalty programs under standards like IFRS 15 or ASC 606, you recognize a liability based on the expected value of future redemptions.
You may be able to adjust your liability downward based on:
Make sure to get professional advice to ensure this is a reasonable method for calculating your points liability.
The exact accounting treatment of loyalty points can vary depending on the standards you follow (e.g., IFRS, US GAAP, etc.) and the region you operate in. Some tax jurisdictions have their own rules on how these liabilities are reported and when they become deductible expenses.
This is where things get more complex. A discount linked to a future sale may be treated differently than a free good. And if you operate in multiple regions, you may need to apply different accounting treatments across your business entities.
There’s no one-size-fits-all answer when it comes to accounting for loyalty points. Some businesses treat them as a direct cost of sale; others carry them as a liability. Both are valid — but which is right for your business depends on factors like how your program is structured, what rewards are offered, how and when points are redeemed, and the accounting standards or tax rules in your region.
What’s critical is that the value tied to those points is captured accurately and consistently in your financial reporting. If you're unsure, work with your accountant or financial advisor. They can help assess the best approach for your situation and ensure you're meeting both compliance and reporting requirements. For cross-border businesses, tax advice may also be needed to handle jurisdictional differences.
What is a points redemption rate?
The percentage of issued loyalty points that customers actually redeem.
What is point breakage?
The portion of issued points that are never redeemed and eventually expire or go unused.
What is the difference between points redemption rate and reward redemption rate?
Points redemption rate measures how many points get used. Reward redemption rate measures how often the rewards claimed with those points are actually fulfilled or used.