6 Replies Latest reply: Jul 1, 2009 1:53 PM by anadyr RSS

loyalty liability

Alumni Steward Platinum 8 Reviews
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According to experts unredeemed loyalty points are listed as a liability on corporate accounting  documents.  Acording to an article in BNET Travel, 

 

"While it may seem obvious that struggling hotel companies would do just about anything to get and keep guests, how much do loyalty reward programs actually help?

 

“The investments are to drive incremental business at the hotels, and the returns go to the hotel owners,” said Joe Rhodes, vice president of customer loyalty at Hilton. “A high percentage of those travelers, if you didn’t have a frequent traveler program, they’ll stay somewhere else. In some respects it’s a retention program.”

 

Loyalty points are held as a liability on a company’s balance sheet; if club members don’t redeem their points, the company ends up writing down the debt. But the company can avoid having to write down the debt by keeping a reserve fund to pay for unredeemed points, as IHG does, according to a company spokesman."

 

For the full text see:

http://industry.bnet.com/travel/10002599/hotels-compete-via-loyalty-programs-but-are-they-worth-it/

  • Re: loyalty liability
    tjcnewyork Platinum
    Currently Being Moderated

    Unfortunately, the BNET article is misleading.  The author's statements suggest a poor understanding of accounting policies.  For a more cogent presentation, consider reviewing Marriott's Notes to Consolidated Financial Statements.*  Published as part of Marriott's Annual Report, the notes spell out in detail Marriott's accounting policy with regards to Marriott Rewards.

     

    * Notes to Consolidated Financial Statements

    (For each location tag, you will be guided through a 3-step process to add (1) a city and a state or a city and a country, (2) a Marriott brand, and (3) a Marriott hotel.)

  • Re: loyalty liability
    Alumni Steward Platinum 8 Reviews
    Currently Being Moderated

    Those Marriott notes say as I read and copy them:

     

    "We defer revenue received from managed, franchised, and Marriott-owned/leased hotels and program partners equal to the fair value of our future redemption obligation. We determine the fair value of the future redemption obligation based on statistical formulas that project timing of future point redemption based on historical levels, including an estimate of the "breakage" for points that will never be redeemed, and an estimate of the points that will eventually be redeemed. These judgment factors determine the required liability for outstanding points."

     

    I do not see the difference in assessment of points liability here or anywhere else.  But then I am not an accountant (but hire them to help me) 

    (For each location tag, you will be guided through a 3-step process to add (1) a city and a state or a city and a country, (2) a Marriott brand, and (3) a Marriott hotel.)

  • Re: loyalty liability
    tjcnewyork Platinum
    Currently Being Moderated

    Here is the comparable section for Hilton.  Hilton takes it a step further by disclosing total liabilities:

     

    "Hilton HHonors is a guest loyalty program operated for the benefit of our family of brands worldwide. Members of the HHonors program earn points based on their spending at most of the hotel properties operated and franchised by us. We accumulate and track points on the members’ behalf and fulfill awards upon request. Points can be redeemed for hotel stays at
    participating properties and for a variety of other awards such as airline tickets, cruises and car rentals.


    HHonors is provided as a guest loyalty program to participating hotels. We charge the cost of operating the program, including the estimated cost of award redemptions, to participating hotels based on members’ qualifying expenditures. These charges do not include a markup or profit element. Our owned hotels record our share of program costs when qualified members stay at our owned hotels. When the members redeem awards at our hotels, our owned hotels recognize revenue for reward stays.


    We use outside actuaries to assist in determining the fair value of the future award redemption obligation based on statistical formulas which project future point redemptions based on factors including historical experience, an estimate of points that will never be redeemed, an estimate of the points that will eventually be redeemed and the cost of reimbursing hotels and other third parties in respect to other redemption opportunities available to members. These estimates are used to determine the required liability for outstanding points. The total liability recorded for outstanding points as of December 31, 2006 and 2007 was $421 million and $505 million, respectively. Approximately $126 million and $152 million is classified as current, which is recorded in accounts payable and accrued expenses, and the remaining $295 million and $353 million is long-term, which is recorded in insurance reserves and other in our consolidated balance sheets ended December 31, 2006 and 2007, respectively. "

    (For each location tag, you will be guided through a 3-step process to add (1) a city and a state or a city and a country, (2) a Marriott brand, and (3) a Marriott hotel.)

  • Re: loyalty liability
    Alumni Steward Platinum 8 Reviews
    Currently Being Moderated

    TCJ:

     

    Thanks--let's hope that the points are never considered compensation by the IRS (was considered a while back by them for airline miles but as I recall the airlines refused to give them a list of participants and mileage totals.  Anyone elsse remember that? 

    (For each location tag, you will be guided through a 3-step process to add (1) a city and a state or a city and a country, (2) a Marriott brand, and (3) a Marriott hotel.)

  • Re: loyalty liability
    nuhusker Platinum 2 Reviews
    Currently Being Moderated
    I seem to recall that Stepping Stones, and I'm surprised that the IRS doesn't pursue this angle.  Since they count the unused points as a liability to Marriott, I can easily see them viewing the unused points as an asset to us. 

    (For each location tag, you will be guided through a 3-step process to add (1) a city and a state or a city and a country, (2) a Marriott brand, and (3) a Marriott hotel.)

  • Re: loyalty liability
    Alumni Steward Platinum 8 Reviews
    Currently Being Moderated

    In my days as a government employee (and there were many) I found that the folks in official travel were conflicted on this issue: Pan Am (whom I flew a lot overseas) was first to start an FT (Federal then Frequent Traveler) designation, and American followed with their Aadvantage program and all the rest fell in line.

     

    So the folks in official travel first said (a) OK, then (b) can't belong, and then (c) if you belong you can use official miles for official travel upgrades only.  Folks at CIA were caught not doing that and fined heavily as well as getting the axe (fired). In the last seven years, realizing the impossibility to control this, the government allowed unlimited accumulation and use for personal travel of airline miles.

     

    I trusted my staff and allowed them to manage their own itineraries with the caveat that in an inspection (which we had more than once) the need to be within the guidelines was ironclad.  No one violated them, thankfully.

     

    So, lurking in some "what can we try next" file cabinet is the idea to tax miles and points--hope no one from that place is reading this! 

    (For each location tag, you will be guided through a 3-step process to add (1) a city and a state or a city and a country, (2) a Marriott brand, and (3) a Marriott hotel.)

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