Academic journal article Academy of Accounting and Financial Studies Journal

Accounting Techniques for Loyalty Programs and Promotional Allowances in the Gaming Industry

Academic journal article Academy of Accounting and Financial Studies Journal

Accounting Techniques for Loyalty Programs and Promotional Allowances in the Gaming Industry

Article excerpt


Despite the fact that various forms of gambling are illegal in many U.S. states, the U.S. commercial gaming industry still generates significant economic activity. According to the American Gaming Association, the "voice of the commercial casino industry" (AGA Annual Report, 2011), 2011 saw industry revenues reach $35.6 billion with casinos employing 339,000 people who received $12.9 billion in wages (AGA 2012). The president of the AGA recently stated, "Today, there are 566 commercial casinos in 22 states that generated $49.5 billion in consumer spending and 400,000 direct jobs in 2010" (Fahrenkopf 2012). He concluded that with indirect effects considered, "This economic activity supported by the commercial casino industry was roughly equivalent to 1 percent of the $14.5 trillion U.S. gross domestic product in 2010."

Though the industry is already economically robust, challenging economic conditions currently facing many municipalities may promote long-term growth in the gaming industry. As States look for alternative sources of revenue, some have decided to consider the increased legalization, and subsequent taxation, of casino gambling within their borders. Such decisions can carry huge economic consequences, as evidenced by the recent ballot referendum on increased gambling legalization in Maryland. In the most expensive political fight in the state's history, spending by rival casino companies reached $95 million-more than was spent in the four previous gubernatorial races combined (Dresser 2012).

As the tax revenue generated by the gaming industry may increase, so, too may the attention paid to the accounting techniques used by casino companies for transactions and activities unique to the gaming industry. In this paper, we focus on the accounting treatment given to loyalty programs and promotional allowance - two elements for which some accounting guidance has been given but diversity in practice remains. We analyze the financial statements of a sample of companies comprising the U.S. gaming industry to provide a description of the accounting procedures currently used in practice. The Gaming Audit & Accounting Guide (Rampulla 2012) states the specific techniques employed and their effect on reported financial performance. These procedures are important considering these costs are significant for firms in the gaming industry.

In the next section, we provide background information on allowable accounting procedures for loyalty programs and promotional allowances. We then analyze the accounting techniques currently used by the gaming industry. We conclude with a discussion that includes suggestions for future research.


Promotional Allowances and Loyalty Programs

Promotional allowances are defined within the gaming industry as discretionary complimentary awards ("comps") based on the customer level of play. These commonly take the form of free or reduced-price travel, lodging, food, and/or casino play. When awarding comps, management may award a favored player an immediate benefit or one that may be redeemed later.

Loyalty programs enable customers to earn rewards through their patronage of the gaming company. In a typical loyalty program, "points" are accumulated by a participating customer who can trade points for various goods and services depending on the level of points accumulated through actions by the player, such as the amount bet at a slot machine in a specified time period. In contrast to the discretionary nature of some promotional allowances, loyalty program rewards represent a contractual obligation by the casino to the customer based upon the customer's past actions. These are similar in nature to the liabilities incurred by a company based upon the purchase of its gift cards.

Allowable Accounting Techniques

While the administration of promotional allowances and loyalty programs may be relatively straightforward, the concepts involved in accounting for them can be more complex, leading to a diversity of techniques in practice as shown by the Gaming Audit & Accounting Guide (Rampulla 2012). …

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