Awards supplied by a third party
A retailer of electrical goods participates in a customer loyalty programme operated by an airline. It grants programme members one airmile with each $1 they spend on electrical goods. Programme members can redeem the airmiles for air travel with the airline, subject to availability. The retailer pays the airline $0.009 for each airmile.
In one period, the retailer sells electrical goods for consideration totalling $1 million and grants 1 million airmiles.
Allocation of consideration to airmiles
The retailer estimates that the fair value of an airmile is $0.01. It allocates to the airmiles 1 million × $0.01 = $10,000 of the consideration it has received from the sales of its electrical goods.
Revenue recognition
Having granted the airmiles, the retailer has fulfilled its obligations to the customer. The airline is obliged to supply the awards and entitled to receive consideration for doing so. Therefore the retailer recognises revenue from the airmiles when it sells the electrical goods.
Revenue measurement
If the retailer has collected the consideration allocated to the airmiles on its own account, it measures its revenue as the gross $10,000 allocated to them. It separately recognises the $9,000 paid or payable to the airline as an expense. If the retailer has collected the consideration on behalf of the airline, i.e. as an agent for the airline, it measures its revenue as the net amount it retains on its own account. This amount of revenue is the difference between the $10,000 consideration allocated to the airmiles and the $9,000 passed on to the airline.