Performance obligations decide how many pieces a sale splits into. Each piece gets its own share of the price and its own timing. For a loyalty program, the first question is whether the points are one of those pieces.
What is a performance obligation?
A performance obligation is a promise in a contract to transfer a distinct good or service to a customer. A series of distinct goods or services that are substantially the same, and that transfer in the same pattern, also counts as one (ASC 606-10-25-14). IFRS 15 uses the same definition (IFRS 15, Appendix A).
It is step two of the five-step model, and every later step runs through it. The price is split across the obligations, and revenue is booked as each one is kept. PwC puts it in one line: “Each distinct good or service that a reporting entity promises to transfer is a performance obligation” (PwC revenue guide 3.3.1).
A promise does not have to be written into the contract. It can come from how a company usually does business, from its published policies or from what it says. It counts if it gives the customer a valid expectation of a good or service (ASC 606-10-25-16). Published program terms are one such policy. Setup work does not count unless it transfers something to the customer (ASC 606-10-25-17).
How do you tell if a promise is distinct?
A good or service is distinct only when it passes two tests (ASC 606-10-25-19):
- Capable of being distinct. The customer can benefit from it alone or with other resources that are readily available. Those are things sold on their own, or things the customer already got from the business. Selling it on its own is a sign it passes.
- Distinct in the contract. The promise to transfer it stands apart from the other promises in the deal.
The second test fails when the goods are inputs to one combined output. The current text names three signs: a major service of combining items, one item heavily changing another, or items that depend heavily on each other (Deloitte DART 5.3, ASC 606-10-25-21). A promise that fails either test joins other promises until the bundle is distinct.
Here is how common loyalty promises come out:
| Promise | Its own performance obligation? | Basis |
|---|---|---|
| Points that give a member a material right | Yes | ASC 606-10-55-42 |
| An option to buy at the standalone selling price | No. It is a marketing offer, booked only if used | ASC 606-10-55-43 |
| A small perk that is immaterial to the contract | Need not be assessed, unless it is a material right | ASC 606-10-25-16A and 25-16B |
| Miles earned with an airline ticket | Yes, apart from the flight | Delta 2025 10-K |
| Points, free night certificates and gift cards given to co-brand cardholders | Yes, each one, apart from the license | Marriott 2025 10-K |
Why are loyalty points a performance obligation?
Points are an option to buy more goods for free or at a discount. ASC 606 names “customer award credits (or points)” as one form of that option (ASC 606-10-55-41). The option is its own obligation only if it gives the customer a material right. The test is a discount the customer would not get without the purchase (ASC 606-10-55-42). If the option only lets the customer buy at the normal standalone price, it is a marketing offer (ASC 606-10-55-43).
Small rewards do not escape the rule. The FASB lets a company skip promises that are immaterial in the context of a contract. It bars that shortcut for a customer option that is a material right (Deloitte DART 5.2.3, ASC 606-10-25-16A and 25-16B). PwC notes that loyalty obligations “can be significant even where the value of each individual incentive is insignificant” (PwC revenue guide 7.2.5).
PwC also says the points’ share of the price rests on their standalone selling price. The cost of supplying the rewards does not set it. Revenue follows when the program keeps its promise on the points, or when they expire.
Points raise a second question when a partner supplies the reward. PwC splits programs into three types by where points can be spent (PwC revenue guide 7.2.5). When points work only with a partner, the issuer first has to judge if it is the principal or an agent. An agent’s promise is to arrange the reward. It books only its net fee.
How do airlines and hotels report their performance obligations?
Their annual reports show the rule at work. Delta says a ticket that earns miles gives the customer two things. In its words, they are “(1) miles earned and (2) air transportation, which are each considered performance obligations.” It values each one on a standalone basis (Delta 2025 10-K).
Marriott gets fees from co-brand card partners. It splits those fees among several promises. The list covers the use of its brand and the points. It also covers free night certificates and gift cards for cardholders. For members, Marriott describes a duty to “provide or arrange for the provision of goods or services” when they redeem points (Marriott 2025 10-K).
Hilton splits its partner fees between a license of its intellectual property and the members’ rights to rewards. It keeps the license over time as the partner uses it. It keeps the points promise when members redeem (Hilton 2025 10-K).
For illustration, a bank pays a hotel program $10 million a year for a co-brand card. The deal promises use of the brand, points for cardholders and an anniversary free night. Say finance sets standalone prices of $6 million, $5 million and $1 million. The $10 million splits in proportion: about $5.0 million, $4.17 million and $0.83 million. The brand share is booked over the year. The points and the free nights wait until members use them or they expire.
When is a performance obligation satisfied?
A performance obligation is satisfied when the customer gets control of what was promised. Finance decides at the start whether that happens over time or at a point in time (ASC 606-10-25-23 and 25-24). A promise is kept over time when the customer gets the benefit as the work goes on, or in two narrower cases (ASC 606-10-25-27). Hilton’s license to its card partners is kept over time, because the partner gets the benefit as it goes. Anything else is kept at a point in time. A flight is kept when it flies. A points promise is kept when the member redeems, or when the points expire.
Promises not yet kept show up in the notes as remaining performance obligations. A company states their total and when it expects to book them as revenue. It can do so in time bands or in words (ASC 606-10-50-13). At the end of 2025, Hilton reported $1,514 million related to Hilton Honors, to be recognized as revenue over about the next two years (Hilton 2025 10-K).
How GRAVTY handles performance obligations
Each promise needs its own record. Finance has to know what was promised and to whom. It also needs the date each promise was kept. GRAVTY records every earn, burn and expiry event at the member and transaction level (points liability). It tracks the cost and value of every point issued and redeemed, with the partner billing insight finance needs (GRAVTY for airlines). Partner promises add up fast. Deutsche Telekom runs one program on GRAVTY with 4,500 partners across 9 countries (partner settlement).
Frequently asked questions
What are examples of performance obligations?
Typical performance obligations are goods, services, licenses and options that give a material right. The standard lists more. It adds standing ready to serve when the customer asks, acting as an agent for someone else and building an asset for a customer (ASC 606-10-25-18).
Can one contract have more than one performance obligation?
Yes. A contract has as many performance obligations as it has distinct promises. A ticket that earns miles carries two, and a co-brand card deal often carries several. When nothing in a contract is distinct, the whole contract is one performance obligation (ASC 606-10-25-22).
Is a warranty a performance obligation?
A warranty is a performance obligation when the customer can buy it on its own, as with an extended warranty. A warranty that only promises the product will work as expected is not one. Its repair costs count as part of the cost of the first sale (PwC revenue guide 8.3).
What is the difference between a performance obligation and a contract liability?
A performance obligation is a promise. A contract liability is cash paid in before the promise is kept. Say a customer pays first. The business then holds a contract liability until it delivers (ASC 606-10-45-2). Once it delivers, that money moves to revenue (ASC 606-10-55-46).
What is a material right?
A material right is an option that gives a customer something it would not get without the contract. The standard’s example is a discount larger than the usual range given to that class of customer in that market (ASC 606-10-55-42). When an option is a material right, part of the price is set aside for it.