Revenue recognition sets the moment a sale turns into revenue. Cash can arrive before that moment or long after it. A loyalty program shows the rule at work, because one receipt pays for two things: the goods today and the reward a member claims later.
What is revenue recognition?
Revenue recognition is the set of rules that decides when revenue goes on the income statement, and in what amount. US companies follow ASC 606. Companies in more than 140 jurisdictions must use IFRS Accounting Standards, which include IFRS 15 (IFRS Foundation). The FASB and the IASB issued the two together in May 2014. They replaced most older rules, including ones written for single industries (Deloitte DART 1.1).
The core idea fits in one sentence. A business books revenue “to depict the transfer of promised goods or services to customers” (ASC 606-10-05-3). The amount is what it expects to be entitled to in exchange. IFRS 15 states the same principle (IFRS Foundation).
So revenue follows delivery, and cash follows the payment terms. A health club joining fee shows the gap. In many cases the standard treats such a fee as an advance payment for future services, booked as those services are provided (ASC 606-10-55-50 and 55-51).
What are the five steps of revenue recognition?
ASC 606 and IFRS 15 apply the core idea in five steps, in order (ASC 606-10-05-4):
- Identify the contract. It is an agreement that creates rights and duties each side can enforce.
- List the promises. Each good or service that stands on its own is a performance obligation.
- Set the transaction price. It is the amount the business expects to be entitled to. It can include amounts that vary.
- Allocate the price. Each promise gets a share in line with what it would sell for on its own.
- Recognize revenue. Revenue is booked when, or as, each promise is kept.
A promise is kept when the customer gets control of what was promised. Control is the ability to direct the use of an asset and to obtain substantially all of its remaining benefits (ASC 606-10-25-23 and 25-25).
When is revenue recognized over time and when at a point in time?
At the start of each contract, the business decides how each promise will be kept. It is kept over time if one of three tests is met (ASC 606-10-25-27):
- The customer gets and uses the benefit as the work is done. A cleaning service is the standard’s own example.
- The work creates or improves an asset the customer controls while the work goes on, such as work in process.
- The work creates an asset with no other use to the business, and the business has an enforceable right to be paid for work done to date.
Any other promise is kept at a point in time. Signs that control has passed include a present right to payment and legal title. Physical possession is another sign (ASC 606-10-25-30). Loyalty programs use both patterns, often inside one receipt:
| Transaction | What the business promised | When revenue is booked | Published example |
|---|---|---|---|
| A purchase that earns points | The goods, plus a right to a future discount | Goods at the sale. The points’ share on redemption or expiry | Hilton books points revenue when members redeem |
| A paid membership fee | Member benefits for the term | Spread across the term | Costco books fees ratably over one year |
| Co-brand card fees for use of the brand | Access to the brand and program for the contract | Over time, as the partner uses it | Hilton treats its license to partners as kept over time |
| Points spent with a partner, where the issuer is an agent | Arranging the partner’s reward | Only the net commission | PwC example RR 7-8 |
| A gift card or shop card | Goods later, for cash now | On redemption, with expected breakage in step | Costco books shop cards on redemption |
How does revenue recognition work in a loyalty program?
Points change the timing of revenue when they give members a material right. ASC 606 lists “customer award credits (or points)” among the options it covers (ASC 606-10-55-41). When an option is a material right, the customer “in effect pays the entity in advance” for future goods (ASC 606-10-55-42). That share of the sale waits as a liability until members redeem or the points expire.
Hilton spells this out in its 2025 annual report. Points give members “a substantive right to free or discounted goods or services in the future.” Hilton also earns fees from partners, including co-brand credit cards. It splits that money between two promises. One is a license to use Hilton’s intellectual property. The other is the members’ rights to rewards. Hilton keeps the license promise over time. It keeps the points promise when members redeem (Hilton 2025 10-K).
PwC sorts programs by where points can be spent (PwC revenue guide 7.2.5). In the first type, points work only with the issuer. In the second, they work only with other businesses. In the third, they work with both. The type decides when the issuer’s promise is kept. When points also buy a partner’s goods, the issuer keeps its promise once a member redeems with it or the points expire. It also keeps it once it hands the duty to the partner.
Paid programs follow the same logic. Costco books its membership fees “ratably over the one-year membership period.” At the end of fiscal 2025, it held $2,854 million of fees not yet earned. Its Executive members earn a 2% reward. Costco books that reward as a cut in sales, net of the share it expects members never to use (Costco 2025 10-K).
For illustration, a retailer sells a $120 yearly membership on January 1 and books it evenly. By March 31 it has earned $30, and $90 is still owed to the member as service. The same member spends $1,000 and earns points with a standalone selling price of $20. The retailer splits the $1,000 by relative value. It books $980.39 now and holds $19.61 until the points are redeemed or expire.
When does a loyalty program book revenue gross or net?
When a partner supplies the reward, the issuer has to decide if it is the principal or an agent. A principal controls the reward before the member gets it and books the gross amount. An agent books only the net amount it keeps after paying the partner (PwC revenue guide 2.5 and 10.2). PwC adds that this is a judgment on the facts of each deal. It is never a policy a company gets to pick.
PwC’s own example shows the math. A retailer gives points that members can spend only on flights with one airline. It allocates $10,000 of its sales to one million points and pays the airline $0.009 for each point redeemed. As an agent, it books the $1,000 difference as commission when it issues the points (PwC revenue guide, Example RR 7-8). Had the retailer been the principal, it would book the full $10,000 as revenue and the airline’s charge as a cost.
How GRAVTY handles revenue recognition
Finance makes every revenue recognition judgment. The records behind those judgments sit in the loyalty platform. 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. That gives finance and loyalty teams the liability, breakage and partner billing insight they need (GRAVTY for airlines). WestJet’s year-end rollover leans on those records. It runs in 28 hours on GRAVTY, down from 10 days on Siebel. The full mechanics of the points balance sit in our guide to points liability accounting.
Frequently asked questions
What is the revenue recognition principle?
The revenue recognition principle says revenue is booked when it is earned and realized or realizable. The SEC staff drew that test from the FASB’s Concepts Statement 5 in SAB 104 (SEC, SAB 104). ASC 606 ties the moment to control. Revenue is booked when the customer gets control of the good or service it was promised (ASC 606-10-25-23).
Is revenue recognized when cash is received?
No. Revenue is recognized when the business keeps its promise to the customer, and cash can arrive before or after that. Cash received early is held as a contract liability until the business delivers. Work done before the customer has to pay sits as a contract asset or a receivable (ASC 606-10-45-1 to 45-4).
What did revenue recognition look like before ASC 606?
Before ASC 606, US public companies used a four-part test from the SEC staff. All four parts had to be met. There had to be persuasive evidence of a deal. Delivery had to have happened. The seller’s price had to be fixed or determinable, and collectibility reasonably assured (SAB 104). In August 2017 the SEC issued SAB 116, which in effect rescinded that test (Deloitte DART 1.1).
How do companies measure progress when revenue is recognized over time?
Companies track progress with an output method or an input method (ASC 606-10-25-33). Output methods count what the customer has got so far, such as milestones reached or units delivered. Input methods count the effort spent so far, such as labor hours or costs, against the total they expect (ASC 606-10-55-17 and 55-20).
Are loyalty points revenue when they are issued?
Points that give members a material right are not revenue when they are issued. Their share of the sale is booked when members redeem them or when they expire (ASC 606-10-55-42). IFRS 15 replaced IFRIC 13, the earlier international rule written for customer loyalty programs (IFRS Foundation).