Dealer sales vehicle incentives

Dealer sales vehicle incentives – Some automotive entities (including automotive parts suppliers (APSs) and original equipment manufacturers (original equipment manufacturers (OEM)s)) needed to change certain revenue recognition practices as a result of applying the revenue recognition standard, IFRS 15 Revenue from Contracts with Customers.  These standards superseded virtually all previous revenue recognition requirements in IFRS and US GAAP. Original equipment manufacturers need to use significant judgement when they identify separate performance obligations (i.e., units of account), which may be different from those identified under IAS 18.

original equipment manufacturers (OEM)s frequently offer sales incentives in contracts to sell vehicles to dealers. These sales incentives may include cash rebates, bonuses or other types of incentives made available to dealers and retail customers (who purchase the vehicle from the dealer). These may also include free, or heavily discounted, goods or services provided to retail customers, such as a free satellite radio or free maintenance for a specified period. Under the standard, the accounting for these incentives may differ depending on their nature.

Under IFRS 15, cash incentives (i.e., cash, credits or other items that can be applied against amounts owed to the Original equipment manufacturers) paid by the Original equipment manufacturers to customers (dealers and retail customers) will generally be treated as a reduction of the transaction price and, therefore, of revenue.

A cash incentive is a discount if the amount is fixed and not contingent on future events.

Cash incentives are variable consideration if the amount varies. original equipment manufacturers (OEM)s may need to review their processes for estimating rebates and other forms of variable consideration to make sure they fully address the requirements for estimating the transaction price (and applying the constraint).

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Furthermore, cash incentives are consideration payable to a customer and will generally be treated as a reduction of the transaction price and, therefore, of revenue.

In much less frequent cases, the payment to the customer is in exchange for a distinct good or service that the customer transfers to the original equipment manufacturers (OEM) (for instance, contribution to local advertising). If the original equipment manufacturers (OEM) is able to reasonably estimate the fair value of the distinct good or service transferred by the customer, the original equipment manufacturers (OEM) accounts for that purchase in the same way it accounts for other purchases from suppliers. .

This is similar, but not identical, to previous IFRS. As such, Original equipment manufacturers will need to evaluate whether the new standard changes the accounting treatment for its cash incentive programs.Dealer sales vehicle incentives

The accounting for free goods and services offered to customers will depend on the facts and circumstances of the offer. original equipment manufacturers (OEM)s will need to carefully assess incentives (whether directly from the original equipment manufacturers (OEM) to retail customers or indirectly through dealers) that provide free or discounted goods to determine whether they represent promised goods or services in their contracts with dealers (i.e., revenue elements or marketing incentives).

With increasing diversity in the types of incentives used to sell a car, more careful analysis and judgement is needed. While many of the free goods or services that original equipment manufacturers (OEM)s offer as sales incentives are ultimately used by the retail consumer after they buy the vehicle from the dealer, they may represent promises the original equipment manufacturers (OEM) makes to the dealer if those rights existed when the original equipment manufacturers (OEM) sold the vehicle to the dealer.

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This applies to both explicit or implicit rights and promises. An example of such indirect incentives provided to a retail customer is free maintenance services performed by a dealer for which the original equipment manufacturers (OEM) provides reimbursement.

The Boards concluded that, even if such incentives are not explicit promises in a contract, they would, nonetheless, be an implied promise if the original equipment manufacturers (OEM) has a customary business practice that results in the retail customer having a valid expectation that the original equipment manufacturers (OEM) is obligated to provide the maintenance services. Therefore, such amounts are considered as promises in the contract and the original equipment manufacturers (OEM) will be required to account for the free services as a revenue element.

Therefore, such amounts are considered as promises in the contract and the Original equipment manufacturers will be required to account for the free services as a revenue element. Dealer sales vehicle incentives

Treating a free good or service as a separate revenue element may be a change in practice for some Original equipment manufacturers. In addition, Original equipment manufacturers will have to review their processes for estimating rebates and other forms of variable consideration to make sure they fully address the new requirements for estimating the transaction price (and applying the constraint) and appropriately document their conclusions. Dealer sales vehicle incentives

Dealer sales vehicle incentives

Dealer sales vehicle incentives

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