Categorizing reward programmes

[Scott Armitage]

Hi all,

I would like to solicit some input on the best method(s) to account for
things such as loyalty rewards programmes. This could e.g. a 2% cash-back
credit card, or an Air Miles card, or any other such loyalty programme
where the user is rewarded. I will provide my specific example.

Consider a fuel (gasoline) vendor loyalty card where for every dollar spent
at that vendor you receive some number of points on your loyalty card. Say
you get 10 points for every dollar spent; the exact ratios are not
important. At certain plateaus you can redeem those points for a fuel
savings reward card. This reward card reduces the cost per litre for
gasoline by some amount for a certain number of litres. In this example,
we'll say you can redeem 10,000 points for the reward card which gives you
a 5 cent/litre cost reduction for 200 litres. This is an intrinsic value of
$10, which would put to overall return of the loyalty card at 1%.

The question is, when purchasing fuel with this reward card, how do you
account for the savings? I see a few different methods and am not sure
which one I like the best.

The first is to simply ignore the points and reward cards entirely, as they
are never considered cash-in-hand. If you were to run a report, you would
see your total fuel expenses as paid for by you, but would have no history
or tracking of what that would have cost you without the loyalty cards.

The second is to treat the fuel savings reward card as "income" in the
amount of its intrinsic value when points are redeemed to get it. This
gives you a history of how much you saved using the loyalty cards, because
an income report would show you your total rewards as a separate income
account. When using the reward card, those transactions would be entered as
a total expense for the original amount, with 5c/L coming from the reward
card account and the rest from your normal payment method. The downside is
your expense report now shows more than you actually spent on fuel, unless
you go and explicitly take the income account into account (erm, oops;
phrasing).

The third method I see is similar to the second method above, except the
reward card comes out of the fuel expense account instead of the fuel
reward income account. Now you still have the tracking as before, but your
fuel expense report shows only the amount that you actually paid for fuel
over the period of interest. I suppose the downside to this is that the
purists probably think it is ugly, but I am not sure that outweighs the
convenience for me.

Suggestions?
-Scott