How to Account for Unredeemed Loyalty Points: Liability, Breakage and a Worked Example

To account for unredeemed loyalty points, estimate the value customers are expected to redeem and record that amount as a loyalty points liability, often presented as deferred revenue or a contract liability. Recognize the allocated amount as revenue when points are redeemed, expire, or otherwise become unlikely to be used. This is a practical explainer, not accounting advice; confirm your policy and entries with your accountant.

Why unredeemed points are a liability, not a marketing expense

Unredeemed points represent a promise to provide a future reward, not merely a marketing cost already consumed. Under IFRS 15 and ASC 606, that promise can be a separate performance obligation. The amount allocated to it remains a loyalty points liability until the store satisfies or releases the obligation.

The IFRS Foundation’s IFRS 15 overview says a performance obligation is a promise to transfer a distinct good or service. It also says the transaction price is allocated using relative stand-alone selling prices and revenue is recognized when the promised good or service transfers. IFRS 15 replaced IFRIC 13, which specifically addressed customer loyalty award credits.

For a merchant, the plain-English result is that part of the original sale may need to wait on the balance sheet. “Deferred revenue” is familiar shorthand, although your financial statements may label the balance a contract liability. Your accountant should determine the allocation method, presentation, tax treatment, and whether materiality changes the process for your store.

The three events you record: issue, redeem, expire

You record three events in the life of loyalty points. Issuing points creates or increases the obligation; redeeming points satisfies part of it and releases the related deferred revenue; expiry removes points under the program’s valid terms and releases the amount that no longer represents an outstanding promise.

1. Issue: Measure the value allocated to newly issued points and credit the liability. Rijoy’s purchase-points documentation bases awards on the actual product price paid after discounts, so use the settled eligible amount rather than an undiscounted catalog price.
2. Redeem: Reduce both the customer’s point balance and the carrying amount associated with those points. Recognize the corresponding allocated revenue using the method approved in your accounting policy.
3. Expire: Remove points only when the published expiration rule has actually been met. Release the associated liability according to your policy and applicable revenue-recognition rules.

These events need a roll-forward, not a snapshot copied from the storefront widget. The opening liability plus value allocated to issues, less amounts released for redemptions and expiry, should reconcile to the closing liability after any change in estimate.

A worked example for a Shopify store

Assume a Shopify store awards 1 point per $1 actually paid, following Rijoy’s purchase points rule. Every 100 points can fund a $5 reward, eligible monthly sales are $200,000, expected redemption is 70%, the opening balance is zero, and customers redeem 40,000 points before month-end.

Step 1: Convert the reward into a value per point

The stated reward is $5 for 100 points:

$5 ÷ 100 points = $0.05 per point

This $0.05 is the reward’s face value per point in the example. It is not an industry benchmark, and it is not automatically the stand-alone selling price required for a formal IFRS 15 or ASC 606 allocation.

Step 2: Calculate points issued and their estimated redeemable value

Eligible paid sales are $200,000 and the earning rate is 1 point per $1:

$200,000 × 1 point per $1 = 200,000 points issued

At a 70% expected redemption rate:

200,000 points × 70% = 140,000 points expected to be redeemed

The simplified value allocated to those expected redemptions is:

140,000 points × $0.05 per point = $7,000

Step 3: Calculate the amount released on redemption

Customers redeem 40,000 points during the month. Under this example’s simplified expected-value method, each issued point carries $0.035 of liability:

$0.05 per point × 70% = $0.035 liability per issued point

Therefore, the amount released is:

40,000 redeemed points × $0.035 = $1,400

The reward’s face value is 40,000 × $0.05 = $2,000, but the liability release is $1,400 because this illustration weighted the initial allocation by expected redemption. A formal allocation may produce a different amount.

Step 4: Reconcile the closing balance

The point roll-forward is:

200,000 issued − 40,000 redeemed − 0 expired = 160,000 outstanding points

The closing liability is:

160,000 outstanding points × $0.05 × 70% = $5,600

That also reconciles from the accounting amounts:

$0 opening + $7,000 issued − $1,400 redeemed − $0 expired = $5,600 closing

Illustrative journal entries

The first entry is shown as a revenue reclassification for readability. Your sales journal, reward structure, relative stand-alone selling-price allocation, taxes, and chart of accounts may require a different entry design.

Breakage: how expected non-redemption changes the number

Breakage is the portion of issued points expected never to be redeemed. A 70% expected redemption rate implies a 30% breakage rate. Estimate it from relevant redemption history, update it when customer behavior changes, and have your accountant approve when and how expected breakage affects revenue.

Consider 1,000,000 outstanding points with the same $5-per-100-point reward, or $0.05 per point. Holding every other assumption constant shows how the estimate changes the balance:

A 10-percentage-point increase from 70% to 80% raises the estimate by $40,000 − $35,000 = $5,000. A 10-percentage-point decrease from 70% to 60% lowers it by $35,000 − $30,000 = $5,000. The table is a sensitivity analysis, not evidence that any rate is typical.

Build the estimate from cohorts that had enough time to redeem. Separate materially different reward rules or customer groups when their behavior differs, document exclusions and refunds, and compare previous estimates with actual outcomes. New programs with little history should avoid unsupported precision and revisit the estimate as evidence accumulates.

Expiry rules and multiplier campaigns change the estimate

Points expiry changes how long customers can redeem, while multiplier campaigns change how many points enter the pool. Both can alter expected redemptions and the liability. Rijoy documents configurable expiration and temporary multipliers, so your month-end calculation should use the rules that applied to each point cohort when it was earned.

The Rijoy FAQ says a merchant can keep points active indefinitely, expire them after inactivity, or use a rolling policy. Do not treat old points as expired merely because redemption slowed; apply the communicated rule and preserve the event date needed to prove the expiration condition.

Rijoy’s points-multiplier campaigns multiply eligible existing earning rules during a configured period. The documentation allows integer multipliers from 2x to 10x and says pausing stops the effect immediately. VIP tiers can also use tier-specific order-point rules, so exports must retain the rule, multiplier, and tier that produced each balance.

The monthly report your loyalty app must give you

Your monthly report must reconcile point movement and supply the assumptions behind the dollar liability. At minimum, ask your loyalty app for issued, redeemed, expired, and outstanding points; cohort dates; a trailing redemption measure; and reward value per point. Without those fields, the balance cannot be reproduced or reviewed.

• Opening and closing outstanding points: the control totals for the period.
• Points issued: split by earning rule, campaign, tier, order, and issue date.
• Points redeemed: include redemption date, points used, and reward delivered.
• Points expired: include expiry date and the rule that triggered expiration.
• Outstanding balance by cohort: group points by issue month and, where useful, earning rule.
• Trailing 12-month redemption rate: show the numerator, denominator, and cohort eligibility, not only a percentage.
• Reward value per point: retain the reward catalog or conversion used for measurement.
• Adjustments: identify refunds, cancellations, manual credits, reversals, imports, and corrections.

Reconcile the app export to Shopify orders and to the general ledger every month. If your app cannot produce one accounting-ready file, ask for transaction-level exports and build a controlled reconciliation that preserves source IDs.

Track outstanding points with Rijoy

Rijoy documents purchase points based on the actual amount paid and offers a Free plan covering 100 orders per 30-day cycle. Review Rijoy pricing, configure the earning rule, then arrange the monthly export and accounting policy with your bookkeeper before relying on the calculated balance.

FAQ

Are unredeemed loyalty points a liability?

Yes, unredeemed loyalty points can create a contract liability because they promise future value to the customer. IFRS 15 and ASC 606 may require part of the transaction price to be allocated to that performance obligation until redemption, expiry, or another permitted release event. Confirm the treatment and materiality with your accountant.

How do you estimate breakage for loyalty points?

Estimate breakage from redemption history for comparable, mature point cohorts. Calculate the share expected not to redeem, document the method, and update the estimate when actual behavior changes. A new program should use a supportable approach rather than borrowing an unverified industry average.

What is the journal entry when a customer redeems points?

Debit deferred revenue and credit revenue for the carrying amount allocated to the redeemed points. In the worked example, 40,000 redemptions release 40,000 × $0.05 × 70% = $1,400. Your accountant may use a different allocation or account structure.

Do expired points count as revenue?

The associated deferred amount may be recognized when points validly expire and the store no longer owes the reward, subject to the applicable accounting policy. Apply the program’s communicated expiration terms and keep evidence of the expiry event. See the Rijoy FAQ for its configurable expiry options.

What data do I need from my loyalty app for this?

You need opening and closing balances plus points issued, redeemed, expired, and adjusted during the month. Keep cohort dates, rule and multiplier details, reward value per point, transaction IDs, and the historical data used for the redemption estimate. The report should reconcile to Shopify and the ledger.