GAAP Accounting for Credit Card Rewards Received
Since GAAP lacks specific guidance for credit card rewards, businesses must create a defensible policy. Learn how to consistently account for and report this value.
Credit card rewards, such as cash back or travel miles earned on corporate spending, are a common benefit for businesses. However, U.S. Generally Accepted Accounting Principles (GAAP) do not provide a single, authoritative standard for their accounting treatment. This lack of specific guidance means companies must develop a rational and consistent accounting policy by referencing broader principles to determine when and how to classify this value.
Establishing an Accounting Policy for Rewards
A company’s first step is to determine if the rewards are material, meaning their value is significant enough to influence the decisions of a financial statement reader. If the value is not material, a simple policy of recording the value only when received as cash or a statement credit is justifiable.
For material rewards, accountants look to existing GAAP standards for analogous situations. One approach is to view rewards as a gain contingency under Accounting Standards Codification (ASC) 450. This framework, which deals with uncertain future gains, means a gain is not recorded until it is realized, such as when cash is received or rewards are redeemed.
An alternative perspective treats rewards like vendor rebates, a concept from ASC 606 on revenue. Here, the rewards are not income but a reduction of the price paid for goods and services purchased with the card. This approach links the reward to the expenditures that generated it.
The principle of conservatism often guides the choice between these models. When faced with uncertainty, accountants should choose the solution that is least likely to overstate assets and income. This principle favors the gain contingency model, as it delays recognition until redemption.
Methods for Valuation and Recognition
A company must establish consistent methods for valuing rewards. Cash back and statement credits are valued at their face amount, as they have a clear dollar value.
Valuing points and miles is more challenging due to their variable worth. One approach is to use the direct cash-out value if the program allows conversion to cash or statement credits. Another method is to calculate a cents-per-point value based on specific redemptions, like flights or hotels, and use a conservative average.
The timing of recognition is another component of the policy. A company could recognize the value when qualifying purchases are made. A more practical approach is to record rewards when the monthly credit card statement is issued and reconciled, which aligns the accounting with a source document.
The most conservative timing is to delay recognition until the rewards are redeemed. Under this method, no asset or income is recorded as points accumulate. The benefit is only entered into the books when the company uses the points, converts them to cash, or receives a statement credit.
Recording Journal Entries and Financial Statement Presentation
If a company treats rewards as income, it first records an asset as rewards are earned. For example, upon earning $200 in rewards, the entry is a debit to “Credit Card Rewards Receivable” and a credit to “Other Income.” When redeemed for a $200 statement credit, the entry would be a debit to “Credit Card Payable” and a credit to “Credit Card Rewards Receivable.”
If the policy is to treat rewards as a reduction of expenses, the entry is different. Upon earning $200 in rewards from purchasing $10,000 in computer equipment, the entry would be a debit to “Credit Card Rewards Receivable” and a credit to the “Computer Equipment” expense account. This reduces the recorded cost of the items to $9,800.
The “Credit Card Rewards Receivable” account, if used, is classified as an “Other Current Asset” on the balance sheet, assuming the company expects to redeem the rewards within one year.
On the income statement, treating rewards as “Other Income” increases total revenue while leaving operating expenses unchanged. Conversely, treating them as an expense reduction lowers specific operating expense lines, such as “Travel” or “Office Supplies,” which can improve operating income and related performance metrics.