IAS 2 Example Contractual volume rebates

IAS 2 Example Contractual volume rebates provides an example calculation with regard to the costs of inventory in combination with contractual volume rebates.

Volume-based discounts should be recognised when it is probable they will be received. When the ‘cost’ for IAS 2 purposes is subject to uncertainties, the most likely cost is used. Therefore rebates that are probable should be deducted from the cost of the inventory and recognised as a prepayment or similar asset.

The probability of obtaining the rebate should be reviewed at future period ends if the arrangement remains open. If receipt is no longer probable, then the prepayment asset should be reversed with a corresponding adjustment to inventories and/or cost of sales as appropriate. IAS 2 Example Contractual volume rebates

If receipt of the rebate is not probable, or the amount cannot be measured reliably, then the inventory should be recorded at its gross amount.

Once recognised, the rebate should be recorded as a reduction to the cost of the related inventory. To the extent that the inventories have already been sold (or used in production that has been sold) that part of the rebate is recorded in the income statement (as a reduction of cost of sales in a presentation of expenses by function). The rebate is recognised to the extent that the related volume target has been met.  IAS 2 Example Contractual volume rebate

Other rebates that do not in substance relate to inventory purchases (eg contributions to promotional costs) should not be deducted from the cost of inventories. There are many types of rebate arrangement, and the appropriate accounting treatment will depend on the specific arrangement. IAS 2 Example Contractual volume rebate

A small case

Purchaser P buys inventory from supplier S at a basic unit price of $10 per unit, fixed for the year 20X1. S agrees that if P makes total purchases of at least 10,000 in 20X1, it will pay a rebate of $5,000 (maximum). At the beginning of the year P’s forecast purchases are 8,000 units for the year. IAS 2 Example Contractual volume rebate

However, at 30.6.X1 P revises its forecast to 11,000 units. IUSDAS 2 Example Contractual volume rebate

At 30.6.X1 P has purchased 5,200 units, of which 3,900 have been used/sold. The remaining 1,300 are held in inventory at a cost of $13,000.

Something else -   All about Inventory discounts and rebates the best 2 go

Analysis IAS 2 Example Contractual volume rebate
At 30.6.X1, the adjustment to inventory cost has become probable. The revised best estimate of cost per unit for the first 10,000 units is:
($10 x 10,000 units – $5,000)/10,000 units = $9.50 IAS 2 Example Contractual volume rebate IAS 2 Example Contractual volume rebate

(Note: This calculation is made based only on the first 10,000 units because any purchases in excess of that figure do not attract any further rebate. )

The cost of the 5,200 units purchased at 30.6.X1 should be therefore be adjusted downwards by $0.5/unit. Because 75% of the units have been sold, a proportion of the rebate recognised should be
recorded in the income statement (cost of sales). The respective entries are as follows: IAS 2 Example Contractual volume rebate

30.6.X1 – Record Probable Rebate DT CR
Prepayment – 5,200 units * $0.5 $2,600
Inventory – 5,200 units * 25% * $0.5 $650
Cost of sales – 5,200 units * 75% * $0.5 $1,950

Note: Subsequent inventory purchases up to the first 10,000 units are recorded at $9.5/unit as long as the rebate continues to be probable. Once the 10,000 threshold is exceeded the cost per unit reverts to $10. IAS 2 Example Contractual volume rebate

The extended Case

On 1 January 20X1 Entity A, a retailer, enters into a 2-year contract with a supplier of product X. Under the agreement, Entity A purchases product X for $100 per item. The agreement provides that Entity A will receive a $5 rebate for each purchased item (applied retrospectively to all purchases) if it purchases at least 10,000 products over the 2-year contract term.

On 1 January 20X1, Entity A purchased 6,000 products. Sales to customers were 5,500 (Q1 1,150, Q2 1,250, Q3 1,450, Q4 1,650), the sales price was increased every quarter with $2/product, starting at $120/product for Q1. At 31 December 20X1 Entity A assess that it is probable that it will earn the rebate as the sale of product X accelerated during the second half of the 20X1. The total estimated sales quantity for the two year period is 11,250. IAS 2 Example Contractual volume rebates

The rebate is contractual, therefore Entity A accrues it in its financial statements for the year 20X1. IAS 2 Example Contractual volume rebates

1 January 20X1 IAS 2 Example Contractual volume rebates

Purchase of 6,000 products

DT

CT

BS – Inventory

$600,000

BS – Trade accounts payable

$600,000

Q 1 20X1 IAS 2 Example Contractual volume rebates

Sales of 1,150 items of product X at $120/product

Revenue recognition at a point in time

DT

CT

BS – Trade accounts receivable

$138,000

PL – Revenue

$138,000

PL – Cost of sales 1,150 * $100

$115,000

BS – Inventory

$115,000

Something else -   Best intro to accounting for cryptocurrencies in 1 view

Based on the realised sales and forecasts for the rest of the year it is not considered probable that the discount volume of 10,000 pieces for the two years will be reached. IAS 2 Example Contractual volume rebates

Q 2 20X1 IAS 2 Example Contractual volume rebates

Sales of 1,250 items of product X at $122/product

DT

CT

BS – Trade accounts receivable

$152,500

PL – Revenue

$152,500

PL – Cost of sales 1,250 * $100

$125,000

BS – Inventory

$125,000

Based on the realised sales (Q1 plus Q2 one-on-one extrapolated is 9,600 pieces for the two years, with Q2 almost 9% higher then Q1) and forecasts for the rest of the year it is estimated 80% probable that the discount volume of 10,000 pieces for the two years will be reached. IAS 2 Example Contractual volume rebates

Estimated discount calculation/recording

Sold 1,150 (Q1) plus 1,250 (Q2) = 2,400, total purchase 6,000 => 3,600 in stock. Discount $5 * 80% = $4: IAS 2 Example Contractual volume rebates IAS 2 Example Contractual volume rebates IAS 2 Example Contractual volume rebates

Discount entry

DT

CT

Discount receivable 6,000 * $4

$24,000

Inventory 3,600 * $4

$14,400

Cost of sales 2,400 * $4

$9,600

Q 3 20X1 IAS 2 Example Contractual volume rebates

Sales of 1,450 items of product X at $124/product

DT

CT

BS – Trade accounts receivable

$179,800

PL – Revenue

$179,800

PL – Cost of sales 1,450 * ($100 -/- $4)

$139,200

BS – Inventory

$139,200

Based on the realised sales (Q1 – Q3 one-on-one extrapolated is 10,267 pieces for the two years, with Q3 16% higher than Q2) and forecasts for the rest of the year it is estimated 100% probable that the discount volume of 10,000 pieces for the two years will be reached. IAS 2 Example Contractual volume rebates

Estimated discount calculation/recording

Sold 1,150 (Q1), 1,250 (Q2) plus 1,450 (Q3) = 3,850, total purchase 6,000 => 2,150 in stock. Discount $5 already recorded is a discount of $4, adjustment $1: IAS 2 Example Contractual volume rebates IAS 2 Example Contractual volume rebates

Discount entry

DT

CT

Discount receivable 6,000 * $1

$6,000

Inventory 2,150 * $1

$2,150

Cost of sales 3,850 * $1

$3,850

Q 4 20X1

Sales of 1,650 items of product X at $126/product

DT

CT

BS – Trade accounts receivable

$207,900

PL – Revenue

$207,900

PL – Cost of sales 1,650 * ($100 -/- $5)

$156,750

BS – Inventory

$156,750

1 January 20X2 

Purchase of 5,500 products

DT

CT

BS – Inventory 5,500 * $95 (full discounted)

$522,500

BS – Trade accounts payable

$522,500

Something else -   1 best way Q Inventory or Equipment?

Q 1 20X2

Sales of 1,350 items of product X at $124/product

DT

CT

BS – Trade accounts receivable

$167,400

PL – Revenue

$167,400

PL – Cost of sales 1,350 * $95

$128,250

BS – Inventory

$128,250

Q 2 20X2

Sales of 1,250 items of product X at $124/product

DT

CT

BS – Trade accounts receivable

$155,000

PL – Revenue

$155,000

PL – Cost of sales 1,250 * $95

$118,750

BS – Inventory

$118,750

No changes in cost ($95/product), some concerns regarding impairments because of lower sales and lower sales prices! IAS 2 Example Contractual volume rebates

Q 3 20X2 

Sales of 950 items of product X at $122/product

DT

CT

BS – Trade accounts receivable

$115,900

PL – Revenue

$115,900

PL – Cost of sales 950 * $95

$90,250

BS – Inventory

$90,250

Based on the sales development (lowering quantities and lower sales) the entity decides to record a $1.5/product impairment (based on a market price of $95 less cost to sell of $1.5), items in stock are 2,450 (see tables below).

Impairment of inventory

DT

CT

Cost of sales impairment of inventory to net realisable value 2,450 * $1.5

$3,675

Inventory

$3,675

Q 4 20X2 IAS 2 Example Contractual volume rebates

Sales of 1,250 items of product X at $120/product

DT

CT

BS – Trade accounts receivable

$150,000

PL – Revenue

$150,000

PL – Cost of sales 1,250 * $93.5

$116,875

BS – Inventory

$116,875

Financial close 31/12/20×2 IAS 2 Example Contractual volume rebates

In December 20×2 the sales department has decided to discontinue the sale of product X. In the financial close of 31/12/20×2 the entity decide to record an additional impairment of $0.5/product (based on a market price of $95 less cost to sell of $2.0), items in stock are 1,200 (see tables below).

Impairment of inventory

DT

CT

Cost of sales impairment of inventory to net realisable value 1,200 * $0.5

$600

Inventory

$600

Closing inventory 1,200 pieces at cost ($95.0) less impairment ($2.0) is $ 111,600. IAS 2 Example Contractual volume rebates

Transaction summary table:

IAS 2 Example Contractual volume rebates

Annualreporting provides financial reporting narratives using IFRS keywords and terminology for free to students and others interested in financial reporting. The information provided on this website is for general information and educational purposes only and should not be used as a substitute for professional advice. Use at your own risk. Annualreporting is an independent website and it is not affiliated with, endorsed by, or in any other way associated with the IFRS Foundation. For official information concerning IFRS Standards, visit IFRS.org or the local representative in your jurisdiction.

Something else -   All about Inventory discounts and rebates the best 2 go

Leave a comment