You are studying with some classmates, and you are reviewing each other’s responses to the following question:

“How do companies offering loyalty programs account for the fact that not all loyalty points earned by customers will be redeemed? How do they account for the points that they expect will be redeemed in the future?” Your classmate responds as follows:

“When companies sell gift cards, not all of the cards will be redeemed by customers. Loyalty points are no different. Companies estimate the stand-alone value of the loyalty points they don’t expect will be redeemed and recognize this amount as breakage revenue. A liability must be recorded for the stand-alone value of the loyalty points held by customers that the company expects will be redeemed in future periods. A corresponding expense is recorded in the period in which the points were earned.”

Required

Identify how your classmate’s answer could be substantively improved.