Loyalty points and rewards: how to account for them under IFRS 15 — and what UAE VAT expects

The mistake almost everyone makes

Most businesses book the full sale as revenue and treat the loyalty points as a future marketing cost. IFRS 15 says the opposite: points a customer earns in a sale are a material right — a separate performance obligation — and part of today's sale price belongs to them. Until the points are redeemed or expire, that slice is a contract liability, not revenue.

The difference is not cosmetic. A retailer with an active programme can be carrying months of deferred revenue; recognising it all upfront overstates today's profit and understates a real obligation — the kind of adjustment an auditor makes late, painfully, and with a restated comparative.

The mechanics, step by step

• Split the transaction price between the goods sold today and the points granted, in proportion to their relative standalone selling prices
• The standalone selling price of a point is not its face value — it is the redemption value weighted by the likelihood of redemption. Points you expect to expire are worth less
• Park the points' share as a contract liability (deferred revenue) on the balance sheet
• Release it to revenue as points are redeemed — in proportion to the pattern of expected total redemptions, so breakage income emerges as the programme runs, not in one lump at expiry
• Re-estimate the redemption rate at each close; the adjustment flows through revenue, not equity

A worked example

A customer spends AED 1,000 and earns points worth AED 50 of future goods, of which you expect 80% to be redeemed. The points' standalone value is AED 40. Allocate: 1,000 × 1,000/1,040 ≈ AED 962 to today's sale, AED 38 deferred for the points. When half the expected redemptions have happened, half the AED 38 has been released — whether or not the calendar says the points are old.

What UAE VAT expects

VAT follows the consideration actually charged, not the IFRS allocation. On the original sale, output VAT is due on the full amount the customer pays — issuing points does not reduce the taxable value. When points are later redeemed as a price reduction on a new purchase, VAT is due on the net amount the customer actually pays for that supply.

The sharp edge is redemptions where the customer pays nothing: goods handed over wholly against points can fall into the deemed-supply rules if input VAT was recovered on them. The regulations carve out small amounts — but the thresholds are per-recipient and per-year, and a busy programme crosses them without noticing. The defensible pattern is to decide the treatment when the programme is designed, document it, and apply it mechanically — not to hope the redemptions stay small.

How Orbit applies this

Orbit carries the points liability as its own ledger account, posts the allocation on each qualifying sale, releases it on redemption evidence, and keeps the redemption-rate estimate as a monthly close decision with the movement history attached — so the liability is always current and the auditor sees the model, not a plug.