Consideration payable to a customer – Great 2 read

Consideration payable to a customer, this is a payable to the customer not a receivable from the customer (just because otherwise I get confused) – When determining the transaction price, an entity should consider the effects of all of the following: (1) variable consideration; (2) a significant financing component (i.e., the time value of money); (3) non-cash consideration; and
(4) consideration payable to a customer.

IFRS 15 Revenue from Contracts with Customers (contents page is here) introduced a single and comprehensive framework which sets out how much revenue is to be recognised, and when. The core principle is that a vendor should recognise revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the vendor expects to be entitled in exchange for those goods or services. See a summary of IFRS 15 here.

This section is part of step 3 determining the transaction price. Consideration payable to a customer includes cash amounts that a Consideration payable to a customervendor pays, or expects to pay, to a customer (or to other parties that purchase the vendor’s goods or services from the customer), credits or other items such as coupons or vouchers that can be applied against amounts owed to the vendor. Alternatively, the payment may be part or all of an amount payable to the customer in return for the supply of goods or services.

Consideration payable to a customer is accounted for as a reduction of the transaction price (and hence, a reduction of revenue), unless the payment to the customer is in exchange for a distinct good or service that the customer transfers to the vendor.

Many consumer products entities make payments to their customers. Common examples of consideration paid to a customer include: Consideration payable to a customer

  • Slotting fees Consideration payable to a customer
  • Co-operative advertising arrangements Consideration payable to a customer
  • Buy downs or price protection Consideration payable to a customer
  • Coupons and rebates Consideration payable to a customer
  • ‘Pay-to-play’ arrangements Consideration payable to a customer
  • Purchase of goods or services Consideration payable to a customer

In addition, some entities make payments to the customers of resellers or distributors that purchase directly from them. For example, manufacturers of breakfast cereals offer coupons to consumers, even though their direct customers are the grocery stores that sell on to end-customers. Furthermore, the promise to pay the consideration might be implied by the entity’s customary business practice. Consideration payable to a customer

To determine the appropriate accounting treatment, an entity must first determine whether the consideration paid or payable to a customer is a payment for a distinct good or service, a reduction of the transaction price or a combination of both. In order for an entity to treat its payment to a customer as something other than a reduction of the transaction price, the good or service provided by the customer must be distinct. Consideration payable to a customer

If the consideration paid or payable to a customer is a discount or refund for goods or services provided to a customer, this reduction of the transaction price (and, therefore, revenue) is recognised at the later of when the entity transfers the promised goods or services to the customer or the entity promises to pay the consideration, taking into account the entity’s customary business practices (i.e., the promise could be implied). This is true even when the payment is contingent upon a future event.

For example, if goods subject to a discount through a coupon are already delivered to the retailers, the discount would be recognised when the coupons are issued. However, if a coupon is issued that can be used with a new line of products that have not yet been sold to retailers, the discount would be recognised upon the sale of that product to the retailer.

If the consideration paid or payable to a customer includes variable consideration in the form of a discount or refund for goods or services provided, an entity will apply the variable consideration requirements. That is, it would use either an expected value method or a most likely amount method to estimate the amount to which the entity expects to be entitled and apply the constraint to the estimate to determine the estimate of the discount or refund. The entity must choose the estimation approach that it believes best predicts the revenue to which it expects to be entitled.Consideration payable to a customer

When the consideration payable to a customer is treated as a reduction of the transaction price the reduction of revenue is recognised when (or as) the later of either of the following occurs: Consideration payable to a customer

  • The vendor recognises revenue for the transfer of the related goods or services to the customer Consideration payable to a customer
  • The vendor pays, or promises to pay, the consideration, even if the payment is conditional on a future event. Such a promise may be implied by the vendor’s customary business practices.

A key point is that any amount paid by a vendor to its customer will be accounted for as a reduction in revenue, unless that payment is in return for a distinct good or service. The requirements for variable consideration and any constraint are also applicable to consideration payable to a customer. Consideration payable to a customer

Example
A consumer goods manufacturer enters into a one-year contract to sell goods to a large retail company. The customer commits to buy at least $250,000 of products during the year. The contract also requires the entity to make a non-refundable payment of $25,000 to the customer at the inception of the contract. The $25,000 payment will compensate the customer for the changes it needs to make to its shelving to accommodate the entity’s products.

The entity concludes that the payment to the customer is not in exchange for a distinct good or service that transfers to the entity. This is because the entity does not obtain control of any rights to the customer’s shelves and the shelving is of no value to the entity absent the revenue relationship. Consequently, the entity determines that the payment is a reduction of the transaction price. The entity concludes that the consideration payable is accounted for as a reduction in the transaction price when the entity recognizes revenue for the transfer of the goods. Consequently, as the entity transfers goods to the customer, the entity reduces the transaction price for each good by 10 percent ($25,000 ÷ $250,000).

The requirements for recognising consideration payable to a customer appear to be inconsistent with the requirements to consider implied price concessions as variable consideration. The TRG discussed this issue in the January and March 2015 meetings and TRG members noted a conflict in the standard. That is, the standard requires entities to estimate all potential variable consideration and reflect it in the transaction price at contract inception and as the entity performs.

However, the requirements for consideration payable to a customer indicate that such amounts are recognised as a reduction of revenue when the related sales are recognised or the entity makes the promise to provide such consideration, whichever is later. TRG members generally agreed that entities will reach different conclusions on the timing of recognition of certain incentives (e.g., new incentive programmes offered after a good or service is transferred to the customer), unless the standard is clarified.

Also read: Consideration payable to a customer

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Consideration payable to a customer

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