Premiums, Coupons, Rebates and Loyalty Programs

Premiums are benefits that customers become entitled to based on current purchases. For example, small toys, souvenirs and credit towards future purchases are often redeemable with proof of purchase today, such as box-tops, coupons, or loyalty points. Premiums are often distinguished from other types of marketing incentive programs since the customer often must purchase something additionally (perhaps simply shipping and handling) in order to cover the cost of the premium. Coupons are vouchers that can be redeemed for a cash discount when purchasing items. Rebates allow buyers to redeem a cash discount after an item is purchased by sending in proof of purchase such as a rebate coupon to the manufacturer. Loyalty programs often allow customers to redeem loyalty points for cash discounts when they purchase additional items. All of these marketing programs are aimed at increasing sales today by providing customers with future benefits. As a result, it is important that company's recognize the cost of these programs in the period in which the benefits accrue, today, instead of in the future when the benefits are redeemed. As a result, all the expected costs associated with these programs should be recognized today as an operating expense. Similarly, the cost of outstanding promotional offers related to past sales that are expected to be redeemed will be recognized as a liability.