S&H Green Stamps – Case Study

Before we begin to discuss the timing of the revenue and expense recognition we should introduce a term related to loyalty programs which is called “breakage”. Breakage is the difference between points issued and points redeemed. Since S&H are getting cash for stamps issued to customers regardless of whether they are redeemed for goods later on (or not), the difference between the two is a major factor in their income and profitability.
As we have learned, the realization principle is the concept that revenue can only be recognized once the underlying goods or services associated with the revenue have been delivered or rendered, respectively. Thus, revenue can only be recognized after it has been earned. In our case since we are discussing a loyalty program that has a “well-known” breakage percentage the revenues should be recognized at two different events.
The first event (Event-I) takes place when the supermarket provides the stamps to the customer. At this point of time it is given that the supermarket will transfer a month later the funds related to this specific stamps transaction. Given that there is a well known “Breakage %”, we can claim at this point in time that S&H have already realized “Breakage %” of the revenues and as such we can recognize this “Breakage %” out of the expected funds transaction.
The rest of the payment should be marked as a liability, till a customer attends one of the S&H stores in order to redeem goods for the stamps (Event-II). At this point, when the goods are delivered to the customer, we should recognize the revenues by crediting it and debiting the liability.
Since we are working under the rules of accrual accounting, the matching principle should be used when it comes to expense recognition. According to the matching principle, when one records revenue, he should also record at the same