Points liability and breakage accounting
Marketing sees points as a cost when they are redeemed. The auditor sees them as a liability when they are issued. The difference shows up at year end, and it is easier to design the program so the two views agree than to reconcile them in March. This is the finance view of a channel loyalty program. It is not accounting advice; agree the treatment with your auditor.
Loyalty points issued but not yet redeemed are a liability of the issuing brand, measured at the expected cost of settling them. Under Ind AS 115, points granted to customers as part of a sale are a separate performance obligation with revenue deferred until redemption or expiry, and breakage, the share expected never to be redeemed, is recognised in proportion to the pattern of redemption rather than all at expiry. For channel programs, rewards paid to distributors, dealers and retailers are usually treated as consideration payable to a customer and therefore a reduction of revenue, while rewards to trade influencers who are not customers are typically a marketing expense; in both cases the unredeemed balance is provided for. Confirm the treatment with your auditor.
Three questions finance will ask
| Question | Usual answer for a channel program | What the platform must provide |
|---|---|---|
| When is the cost recognised? | When the point is issued, at expected settlement cost net of expected breakage, not when redeemed | Points issued by period, by tier, with rupee value |
| Where does it sit in the P&L? | Rewards to customers (dealers, retailers) as reduction of revenue; rewards to non-customers (influencers) as marketing expense; agree with auditor | Issuance split by member type |
| What is the liability at period end? | Outstanding points × settlement cost × (1 − expected breakage), plus accrued but unposted scheme payouts | Outstanding balance by expiry bucket; redemption history to estimate breakage |
Estimating breakage
Breakage is the share of issued points that will never be redeemed. In the first year there is no history, so a conservative estimate is used and trued up; from year two the platform's redemption curves by cohort give a defensible number. Channel programs paying by UPI at low thresholds break less than catalogue-only programs; the benchmarks page gives ranges of 15 to 40 percent. Ind AS 115 requires breakage to be recognised in proportion to redemptions as they happen, so a program with a 12-month expiry releases most of its breakage across the year, not in a lump at expiry.
Why expiry matters to finance
Without expiry, the liability grows for as long as the program runs and every dormant member's balance sits on the balance sheet indefinitely. A 12-month expiry, communicated at issuance and before expiry, caps the tail and gives breakage a determinable point. It is also the honest design: members know the terms. See earn rate design for the member-side rules.
Scheme accruals versus points
Target-linked schemes create a different accrual: at period end, the brand owes payouts for targets met but not yet settled. The platform should compute the accrued liability per dealer at month end so finance does not estimate it. How the settlement is documented, as a commercial credit note, a tax credit note or a cash payout, determines the GST treatment; see GST on rewards. Tax withheld under 194R is a separate liability to the department; see the 194R guide.
The month-end report to ask for
- Points issued in the month, by tier, with rupee value at settlement cost.
- Points redeemed in the month, by reward type (UPI, bank, catalogue, gift card), with cost.
- Points expired in the month.
- Outstanding balance at month end by expiry bucket (0–3, 3–6, 6–12 months).
- Scheme payouts accrued but not settled, by dealer.
- 194R deducted and deposited; 194B for any draws.
- Cohort redemption curves for the breakage estimate.
A platform that produces these seven lines on the first working day of the month has done finance's work. The ROI calculation and budget planning guides use the same figures from the other side.
Key takeaways
- Unredeemed points are a liability at issuance, measured at settlement cost net of expected breakage.
- Channel rewards to customers usually reduce revenue; rewards to non-customer influencers are usually marketing expense. Agree it with your auditor.
- Breakage is recognised in proportion to redemptions, so expiry and cohort curves matter.
- Ask the platform for the seven-line month-end report and the accrued scheme liability by dealer.
Frequently asked questions
Are unredeemed loyalty points a liability?
Yes. Points issued and not yet redeemed are a liability of the brand, measured at the expected cost of settling them net of expected breakage, and provided for at each period end.
How is breakage accounted for under Ind AS 115?
Breakage, the share of points expected never to be redeemed, is recognised in proportion to the pattern of redemption rather than in a lump at expiry. Cohort redemption curves from the platform support the estimate. Confirm with your auditor.
Are channel loyalty rewards a marketing expense or a reduction of revenue?
Rewards to customers such as distributors, dealers and retailers are usually consideration payable to a customer and reduce revenue. Rewards to trade influencers who are not customers are usually a marketing expense. Agree the treatment with your auditor.
How do I estimate the loyalty liability at year end?
Outstanding points multiplied by settlement cost, reduced by expected breakage, plus scheme payouts accrued for targets met but not yet settled, plus any 194R or 194B tax withheld and not yet deposited.
Why should loyalty points expire?
Expiry caps the liability tail, gives breakage a determinable point and keeps dormant balances off the balance sheet indefinitely. A 12-month expiry communicated at issuance and before expiry is standard.
What report should finance ask the loyalty platform for each month?
Points issued, redeemed and expired with rupee values, outstanding balance by expiry bucket, scheme payouts accrued by dealer, 194R and 194B deducted and deposited, and cohort redemption curves.