IFRS 15 Consumer products revenue accounting – Complete best read

IFRS 15 Consumer products

IFRS 15 Production revenue comprises:

  • Product sales from consumer products companies to retailers, see below
  • Contractual arrangements between consumer products companies and retailers other than product sales, read it here, and
  • Transactions between end-customers and consumer products companies, read it here.

Cases are used to detail these different types of sales/distribution channels to retailers, other product sales and directly to end-consumers and explain their recording under IFRS 15 Revenue from contracts with customers.


Product sales from consumer products companies to retailers

Case – Transfer of control

CosmeticsCo, a consumer products company, uses a CostCo a supermarket chain, to supply its products to the end-customers.

CostCo receives legal title and is required to pay for the products on receipt.

CostCo has no right of return to CosmeticsCo.

When does the consumer products company recognise revenue in accordance with IFRS 15?

The rules

IFRS 15.31: “an entity shall recognize revenue when the entity satisfies the performance obligation by transferring a promised good or service (that is, an asset) to a customer. An asset is transferred when the customer obtains control of that asset.”

IFRS 15.33: “ Control of an asset refers to the ability to direct the use of, and obtain substantially all of the remaining benefits from, the asset. Control includes the ability to prevent other entities from directing the use of, and obtaining the benefits from, an asset. The benefits of an asset are the potential cash flows (inflows or savings in outflows) that can be obtained directly or indirectly in many ways.”

IFRS 15.38 requires an entity to consider indicators of the transfer of control, which include, but are not limited to, the IFRS 15 Consumer productsfollowing:

  1. “the customer has a present right to payment……
  2. the customer has legal title to the asset……
  3. the customer has obtained physical possession of the asset…
  4. the customer has the significant risks and rewards of ownership…..
  5. the customer has accepted the asset…..”

Consideration
Revenue is recognised by CosmeticsCo when control of the products is transferred. CostCo has physical possession, legal title and a present obligation to pay for the asset at the time of receipt of the products. These are all indicators that control is transferred when the products are delivered to the retailer.

Case – Right of return

WatchCo uses a wholesale network to supply its products to end customers.

WatchCo sells 100 watches to a retailer for €50 each. The cost of each watch is €10.

WatchCo estimates, based on the expected value method , that 6 % of watches sold will be returned, and it is highly probable that returns will not be higher than 6%.

WatchCo has no further obligations after transferring control of the watches.

Situation A

Retailer has a contractual right to return the watches for a full refund for a contractually defined period.

Situation B

Retailer has no contractual right, but WatchCo has a customary business practice where returns have been made and accepted.

How should WatchCo recognise revenue in accordance with IFRS15?

The rules

IFRS 15.10: “A contract is an agreement between two or more parties that creates enforceable rights and obligations. IFRS 15 Consumer productsEnforceability of the rights and obligations in a contract is a matter of law. Contracts can be written, oral or implied by an entity’s customary business practices.

The practices and processes for establishing contracts with customers vary across legal jurisdictions, industries and entities […]. An entity shall consider those practices and processes in determining whether and when an agreement with a customer creates enforceable rights and obligations.”

A right of return is not a separate performance obligation, but it affects the estimated transaction price for transferred goods. Revenue is only recognised for those goods that are not expected to be returned. The estimate of expected returns should be calculated in the same way as other variable consideration.

  1. The estimate should reflect the amount that the entity expects to repay or credit customers, using either the expected value method or the most likely amount method.
  2. The transaction price should include amounts subject to return only if it is highly probable that there will not be a significant reversal of cumulative revenue if the estimate of expected returns change.

IFRS 15.B21 requires entities to account for sales with a right of return recognising all of the following:

  1. Revenue for the transferred products in the amount of consideration to which the entity expects to be entitled (therefore, revenue would not be recognized for the products expected to be returned)
  2. A refund liability
  3. An asset (and corresponding adjustment to cost of sales) for its right to recover products from customers on settling the refund liability.”

Consideration

Situation A

Revenue is recognised when the watches are delivered and a liability deducted from revenue for expected returns.

Simultaneously , an asset is recognised for the watches expected to be returned, reducing the cost of sales.

Recognition occurs on transfer of control to the wholesaler.

The returns asset will be presented and assessed for impairment separately from the refund liability. WatchCo will need to assess the returns asset for impairment, and adjust the value of the asset if it is impaired.

Revenue: Sales price per unit × units (excluding those expected to be returned) €50 × 100*(1 0.06 ) watches = 4,700

Cost of sales: Cost × units (excluding those expected to be returned) €10 × 94 watches = 940

Asset: Former carrying amount x units expected to be returned €10 × 6 watches = €60

Liability: Return ratio x units sold x sales price per unit 6% x 100 watches × €50 = €300 for the refund obligation .

Situation B

WatchCo has a customary business practice of accepting returns which should be considered part of the terms of the contracts with its customers.

The right of return is accounted for in the same manner as in situation A.

IFRS 15 Consumer products

Case – Consignment arrangements

GardenfurnishingsCo provides teak furniture to a garden centre on a consignment basis. The products are immediately proposed for sale in the garden centre.

GardenfurnishingsCo retains title to the products until they are sold to the end customer.

The garden centre does not have an obligation to pay GardenfurnishingsCo until a sale occurs, and any unsold products can be returned to GardenfurnishingsCo.

GardenfurnishingsCo also retains the right to take back any unsold products, or to transfer unsold products to another retailer.

Once the garden centre sells the products to the end customer, GardenfurnishingsCo has no further obligations, and the retailer has no further return rights.

When does GardenfurnishingsCo recognise revenue in accordance with IFRS 15?

The rules

Consignment arrangements are where an entity ships goods to a distributor but retains control of the goods until a predetermined event occurs. Revenue is not recognised on delivery of the goods to another party if the delivered products are held on consignment.

IFRS 15.B77: When an entity delivers a product to another party (such as a dealer or a distributor) for sale to end customers , the entity shall evaluate whether that other party has obtained control of the product at that point in time.

A product that has been delivered to another party may be held in a consignment arrangement if that other party has not obtained control of the product. Accordingly, an entity shall not recognise revenue upon delivery of the product to another party if the delivered product is held on consignment.”

IFRS 15.B78: Indicators that an arrangement is a consignment arrangement include, but are not limited to, theIFRS 15 Consumer products following:

  1. the product is controlled by the entity until a specified event occurs, such as the sale of the products to a customer of the dealer or until a specified period expires;
  2. the entity is able to require the return of the products or transfer the products to a third party (such as another dealer); and
  3. the dealer does not have an unconditional obligation to pay for the products (although it might be required to pay a deposit

Consideration
GardenfurnishingsCo should recognise revenue once the garden centre sells the product to the end customer. Although the garden centre has physical possession of the products, it does not take title, only a right to sell, and it does not have an unconditional obligation to pay GardenfurnishingsCo. GardenfurnishingsCo retains the right to call back the products. Therefore, revenue is not recognised when the goods are delivered to the garden centre in accordance with the guidance in IFRS 15.B77-B78.

GardenfurnishingsCo should also assess whether it is the principal to the transaction with the end-customer. If this is the case, it would recognise revenue in the amount that was received from the end customer, and the amount retained by the garden centre would be recognised as commission expense (see also Concession outlet within a department store).

Case – Volume discount

TellieCo, an electronics manufacturer, enters into an arrangement with one of its major retailers, under which the retailer will receive a 5% discount on all purchases if the purchases by the retailer exceed 100,000 for the annual period ending 31 December.

Something else -   IFRS 15 Identifying the contract contract extensions

At 30 June, purchases by the retailer from TellieCo amount to €30,000. TellieCo forecasts that, due to the historic seasonality of the revenues (which peak prior to December in the run up to the year end holidays) and the launch of new products, the annual sales to the retailer will be in the range of €110,000 − 120,000.

How should TellieCo measure the revenue at 30 June?

The rules

IFRS 15.50 states: “ if the consideration promised in a contract includes a variable amount, an entity shall estimate the amount of consideration to which the entity will be entitled in exchange for transferring the promised goods or services to a customer.”

IFRS 15.51 : An amount of consideration can vary because of discounts, rebates, refunds, credits, price concessions, incentives, performance bonuses, penalties or other similar items. The promised consideration can also vary if an entity’s entitlement to the consideration is contingent on the occurrence or non occurrence of a future event. For example, an amount of consideration would be variable if either a products was sold with a right of return or a fixed amount is promised as a performance bonus on achievement of a specified milestone.”

IFRS 15.53 , an entity should estimate an amount of variable consideration by using one of two methods –“the expected value” and “the most likely amount” whichever method is a better prediction of the final outcome.

According to IFRS 15.56, the transaction price should include some or all of an amount of variable consideration estimated in accordance with paragraph 53 only to the extent that it is highly probable that a significant reversal in the amount of cumulative revenue recognised will not occur when the uncertainty associated with the variable consideration is subsequently resolved.

Consideration
The transaction price of the goods sold to date includes an element of consideration which is variable or contingent on future events. TellieCo must estimate and recognise a liability at 30 June for the amount that it is expected to pay for the volume discount, and it recognises revenue only to the extent that it is highly probable that a significant reversal will not occur. TellieCo recognises a provision for the most likely amount that will be payable to the retailer of €1,500 (€30,000 × 5%).

Case – Bill and hold arrangements

Consoles AG, a video game company, enters into a contract to supply 100 000 video game consoles to a retailer, Durbin, branded with Durbin’s logo, to be delivered by the end of the year.

The contract contains specific instructions from the retailer about where the consoles should be delivered.

The retailer expects to have sufficient shelf space at the time of delivery.

As of year end, Consoles AG has shipped 60 000 units and the remaining 40 000 inventory of Durbin branded consoles have been produced, packed and are ready for transport However, the retailer asks for the shipment to be held, due to lack of shelf space

When should Consoles AG recognise revenue for the 100,000 units to be delivered to the retailer?

The rules

Bill and hold arrangements arise when a customer is billed for goods that are ready for delivery, but the entity does not ship the goods to the customer until a later date. Entities must assess in these cases whether control has transferred to the customer, even though the customer does not have physical possession of the goods. Revenue is recognized when control of the goods transfers to the customer.

IFRS 15.B81 presents the following additional criteria that all need to be met in order for the customer to have obtained control in a bill and hold arrangement:

  1. the reason for the b ill and hold arrangement must be substantive (for example, the customer has requested the arrangement);
  2. products must be identified separately as belonging to the customer;
  3. products currently must be ready for physical transfer to the customer; and
  4. products cannot be used or directed to another customer.

Consideration

At the year end, Consoles AG should recognise revenue for all 100,000 units, because all of the criteria exist for the control of the units to have transferred to Durbin. Since the goods are branded, they can not be directed to another customer, they are clearly identified as belonging to Durbin, and the reason for entering into the transaction is substantive (that is, lack of shelf space).

Case – Shipping terms

Screens Inc an electronics manufacturer has an arrangement with a retailer to sell televisions and arrange for the shipping.

The delivery terms state that legal title and risk of loss passes to the retailer when the televisions are provided to the carrier.

The retailer does not have physical possession of the televisions during transit, but has legal title at shipment and therefore can redirect the televisions to another party.

Screens is also precluded from selling the televisions to another customer once the televisions have been picked up by the carrier at Screens’ shipping dock.

How many performance obligations does Screens have and when should it recognize revenue?

The rules

A performance obligation is a promise to provide a distinct good or service or a series of distinct goods or services as defined by the revenue standard.

IFRS 15.22 states that “at contract inception, an entity shall assess the goods or services promised in a contract with a customer and shall identify as a performance obligation each promise to transfer to the customer.”

When there are multiple promises in a contract the company must determine whether goods or services are distinct and therefore separate performance obligations exist.

IFRS 15.27 states “that a good or service that is promised to a customer is distinct if both of the following criteria are met

  1. Customer can benefit from good/service on its own or with other resources readily available to the customer (good/service is capable of being distinct
  2. Promise to transfer good/service to customer is separately identifiable from other promises in the contract (promise to transfer good/service is distinct within the context of the contract).”

IFRS 15.33 and IFRS 15.35 provide useful guidance on transfer of control in general and on over time revenue recognition for services.

Consideration
There are two performance obligations 1 sale of the televisions and 2 if not de-minimos shipping services.

Revenue recognition for sale of televisions

  • When control transfers to the retailer in this fact pattern when goods are provided to the carrier
  • Retailer can benefit from the televisions on their own
  • No impact of the shipping service as it is a distinct service

Revenue recognition for shipping services

  • When performance occurs, usually over the shipping period
  • Retailer can benefit from the shipping together with the TV that it has already obtained

In many cases, a third party carrier will be used to deliver the products An entity will need to evaluate whether they are the principal or agent for the shipping services If they are the agent, revenue should be recognised net of the payment to the third party carrier ie revenue will be the commission income).


Contractual arrangements between consumer products companies and retailers other than product sales

Case – Slotting fees

ShampooCo, a consumer products company, has a policy of paying ‘slotting fees’ to retailers, in order to have the products allocated to advantageous spaces in the retailers’ premises for a defined period of time. For example, the products are placed near the checkout counter, to be more noticeable for customers.

ShampooCo sells products to CheapCo , a retailer, for €100,000. Simultaneously, it is invoiced €5,000 for a specific placement in the store which will generate additional sales.

How should the retailer account for slotting fees paid by the consumer products entity?

The rules

An entity should account for consideration payable to a customer as a reduction of the transaction, unless the payment to the customer is in exchange for a distinct good or service that the customer transfers to the entity.

A good or service that is promised to a customer is distinct if both of the following criteria are met (by virtue of IFRS 15.27):

  1. Customer can benefit from good/service on its own or with other resources readily available to the customer (ie the good/service is distinct).
  2. The entity’s promise to transfer good/service to customer is separately identifiable from other promises in the contract (promise to transfer good/service is distinct).

Furthermore, IFRS 15.71 requires that, if an entity cannot reasonably estimate the fair value of the good or service received from the customer, it should account for all of the consideration payable to the customer as a reduction of the transaction price.

Consideration
Slotting fees would not occur without the purchase of goods from the consumer products company, and they are therefore highly dependent on the purchase of the products Thus, slotting fees are not distinct and should be accounted for as a reduction of the selling price ShampooCo recognises the slotting fees as a reduction of revenue

Case – Waste disposal payments

In some countries, consumer products companies are obliged to take back or dispose of the transport packaging when selling goods to their retailers. In practice, retailers usually take over the responsibility for disposing of the transport packaging. In return, they receive a refund from the consumer products company as compensation (waste disposal payment).

How should the consumer products company recognise the payment made to the retailer for the disposal of the transport packaging?

The rules

Something else -   Contract costs from Contracts with Customers

An entity should account for consideration payable to a customer as a reduction of the transaction, unless the payment to the customer is in exchange for a distinct good or service that the customer transfers to the entity.

A good or service that is promised to a customer is distinct if both of the following criteria are met (by virtue of IFRS 15.27):

  1. Customer can benefit from good/service on its own or with other resources readily available to the customer ( ie the good/service is distinct).
  2. The entity’s promise to transfer good/service to customer is separately identifiable from other promises in the contract (promise to transfer good/service is distinct).

If the amount of consideration payable to the customer exceeds the fair value of the distinct good or service that the entity receives from the customer, the entity should account for such an excess as a reduction of the transaction price. If the entity cannot reasonably estimate the fair value of the good or service received from the customer, it should account for all of the consideration payable to the customer as a reduction of the transaction price (under IFRS 15.71).

Consideration
Consumer products companies could dispose of the transport packaging themselves, or they could engage a third party to provide the service Therefore, the disposal service provided by the retailer is distinct and separately identifiable.

The payment should be accounted for in the same way that the consumer products company accounts for other purchases or services provided by suppliers The amount paid will be recognised as an expense by the consumer products company.

However, if the amount paid for the service does not reflect its fair value, the portion of the cost above the fair value should be accounted for as a reduction of the revenue generated from sales to the retailer.

Case – Trade incentives – Co-advertising services

Hiccup plc, a beverage producer, has entered into agreements with two of its customers (Retailer A and Retailer B) in relation to product advertising and promotion.

Retailer A

Hiccup plc has entered into an advertising arrangement with Retailer A, under which advertisements are to be published in a local newspaper . Hiccup plc has had arrangements in the past directly with the local newspaper and, absent the arrangement with the retailer, would advertise locally.

Retailer A will contract directly with the local newspaper and pay for the full cost of the campaign. Under a separate contractual arrangement with Retailer A, Hiccup plc has committed to reimburse 50 % of the advertising costs. In order for Hiccup plc to reimburse Retailer A, it requires Retailer A to place adverts and provide the associated proof of placement in the local newspaper.

Retailer B

Hiccup plc also enters into a contract with Retailer B, under which Retailer B is entitled to an advertising allowance of €10m if it advertises Hiccup plc’s goods on advertising boards and in its publicity mailings with certain regularity throughout the year. Retailer B only advertises brands that it lists/sells.

How should these transactions be recorded?

The rules

An entity should account for consideration payable to a customer as a reduction of the transaction, unless the payment to the customer is in exchange for a distinct good or service that the customer transfers to the entity.

A good or service that is promised to a customer is distinct if both of the following criteria are met (by virtue of IFRS 15.27):

  • Customer can benefit from good/service on its own or with other resources readily available to the customer ( ie the good/service is distinct)
  • The entity’s promise to transfer good/service to customer is separately identifiable from other promises in the contract (promise to transfer good/service is distinct)
  • If the amount of consideration payable to the customer exceeds the fair value of the distinct good or service that the entity receives from the customer, the entity should account for such an excess as a reduction of the transaction price. If the entity cannot reasonably estimate the fair value of the good or service received from the customer, it should account for all of the consideration payable to the customer as a reduction of the transaction price (under IFRS 15.71).

Consideration
In many circumstances, trade incentives might vary depending on local practices between consumer products companies and retailers. It might often be difficult to determine if a service can be considered as distinct or not.

Arrangement with Retailer A

The payment to Retailer A is for a distinct service Hiccup plc has previously purchased similar advertising at similar pricing, and Hiccup plc could have entered into this arrangement whether or not Retailer A is a customer.

The fair value of the advertising services can be reasonably estimated, and Hiccup plc is paying Retailer A fair value for such services Hiccup plc recognises the advertising costs as an expense in the income statement

Arrangement with Retailer B

Hiccup plc is unable to identify a distinct service and/or separate the arrangement from the underlying customer relationship and sales/purchase arrangement. Therefore the amounts due by Hiccup plc to Retailer B would be recognised as a reduction of Hiccup plc’s revenue.

Case – Trade incentives – Scan deals

Scan deals are agreements that involve a joint promotional campaign between consumer goods companies and retailers. The agreements generally specify that the seller grants reduced prices to retailers who , at the same time, offer promotional prices to consumers.

  • Showergel, a consumer goods company, and a retailer agree that, for a period of two months, all sales of certain products will be subject to a special promotional price. The promotional period of two months will coincide with Showergel’s media campaign for the products.
  • Showergel does not have an established practice of scan deals.
  • Showergel’s normal selling price to the retailer is €80 ; the selling price from the retailer to consumers is €100.
  • Showergel and the retailer agree that both of their respective prices will be reduced by 20%. The reductions in price apply only to goods sold in the promotional period.
  • The retailer reports unsold discounted products to Showergel at the end of the promotional period, and it reimburses any unearned discount.

How does Showergel account for the discount arising from scan deals?

The rules

IFRS 15.47: “An entity shall consider the terms of the contract and its customary business practices to determine the transaction price. The transaction price is the amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer, excluding amounts collected on behalf of third parties (for example, some sales taxes). The consideration promised in a contract with a customer may include fixed amounts, variable amounts, or both.”

Consideration
Showergel should consider the discount in determining the transaction price. The entity will need to estimate the number of products that will be sold by the retailer at a discount during the promotional period. The discount of € 16 (20% off the regular price of € 80) per unit expected to be sold during the period is applied as a reduction of the transaction price and, therefore, as a reduction of revenue. This can be either a reduction relating to inventory already held by the retailer or a deduction from sales to the retailer during the scan deal period, as appropriate.

Revenue must only be recognised to the extent that it is highly probable that a significant reversal will not occur once the number of products that qualify for the discount is finally determined. At this point, the amount of revenue recognised will be adjusted to reflect the total discount granted.

Case – Retail fixture compensation

SmoothLines, a consumer products company, gives a retailer compensation to cover their cost for retail store renovation to meet the standard required by SmoothLines. The contract has a minimum purchase requirement.

The compensation will be paid partly as a lump sum on completion of the renovation, with an additional discount offered to the retailer in relation to future sales which exceed the minimum purchase requirements.

How should the retailer and SmoothLines account for the arrangement?

The rules

An entity should account for consideration payable to a customer as a reduction of the transaction, unless the payment to the customer is in exchange for a distinct good or service that the customer transfers to the entity.

A good or service that is promised to a customer is distinct if both of the following criteria are met (by virtue of IFRS 15.27):

  1. Customer can benefit from good/service on its own or with other resources readily available to the customer ( ie the good/service is distinct)
  2. The entity’s promise to transfer good/service to customer is separately identifiable from other promises in the contract (promise to transfer good/service is distinct

Consideration
SmoothLines does not receive a distinct good or service in exchange for the compensation paid to the customer. SmoothLines should recognise the compensation as a reduction of revenue for the related goods. The goods to which the reduction of revenue is attributable will depend on the contractual arrangements.

The retailer should record the amounts received as a reduction in the cost of inventory acquired under this contract, with the lump sum being allocated pro rata to the minimum purchase requirement.

Something else -   Breach of Contract

Case – Retail markdown compensation

Markdown compensation (also known as price protection) is an arrangement between a consumer goods company and a retailer, under which the consumer goods company pays compensation to the retailer for losses as a result of reduction in the market price.

  1. DeNimes is a well known clothing producer. In order to prevent obsolete products from accumulating in the distribution channel and to maintain relationships with the retailers, DeNimes has a well established practice of providing retail markdown compensation on outgoing collections two weeks before the launch of a new collection.
  2. Capsules is a newcomer to the coffee machine market . Its first model has been highly successful over the past three years but, as a result of the launch of the next model, Capsules has decided to provide retail markdown compensation, to eliminate the first model inventory from the retail channel . The second model will be sold directly through Capsules’s website.

How and when do these consumer goods companies account for the markdown compensation that they grant to retailers?

The rules

IFRS 15.50: “Consideration payable to a customer includes cash amounts that an entity pays, or expects to pay, to the customer (or to other parties that purchase the entity’s goods or services from the customer). Consideration payable to a customer also includes credit or other items (for example, a coupon or voucher) that can be applied against amounts owed to the entity (or to other parties that purchase the entity’s goods or services from the customer).

An entity shall account for consideration payable to a customer as a reduction of the transaction price and, therefore, of revenue unless the payment to the customer is in exchange for a distinct good or service (as described in IFRS 15.26-30) that the customer transfers to the entity. If the consideration payable to a customer includes a variable amount, an entity shall estimate the transaction price (including assessing whether the estimate of variable consideration is constrained) in accordance with IFRS 15.50-58.”

IFRS15.72: “Accordingly , if consideration payable to a customer is accounted for as a reduction of the transaction price, an entity shall recognise the reduction of revenue when (or as) the later of either of the following events occurs:

  1. the entity recognises revenue for the transfer of the related goods or services to the customer; and
  2. the entity pays or promises to pay the consideration (even if the payment is conditional on a future event). That promise might be implied by the entity’s customary business practices.”

Consideration
The consumer goods companies should recognise revenue when control of the products is transferred to the customer. Revenue will be reduced by the amount of the markdown compensation that the company pays, or expects to pay, to the retailer.

DeNimes should reduce the transaction price for estimated markdown compensation when it recognises revenue on shipment of the original collection. Although DeNimes has not yet offered the compensation, it has a customary business practice of providing compensation and, it intends and expects to provide compensation related to the original collections. Therefore, DeNimes should account for the compensation following the guidance on variable consideration.

As Capsules had no past practice of markdown compensation; it accrues the markdown compensation as a reduction of revenue as soon as it has offered the payment, based upon the amount of inventory in the channel.


Transactions between end-customers and consumer products companies

Case – Customer incentives – Coupons with purchase

Truewhite plc, a detergent manufacturer, sells its best selling product through retailers at a price of €20 to the retailer. End customers purchasing the product receive a voucher at the till for a price reduction coupon of €2 , redeemable on a subsequent purchase of the same product. The price reduction coupon is only made available to those who have purchased the product , and there are no equivalent coupons available to the general public. At the end of the period , Truewhite plc has sold 1,000 units , as has the retailer

The redeemed coupons entitling the end customers to a €2 discount on their purchases will be reimbursed by the manufacturer to the retailers.

The manufacturer has historical experience that one coupon is redeemed for every two issued.

How does the soap manufacturer account for the coupons?

The rules

An entity should account for consideration payable to a customer as a reduction of the transaction price and, therefore, of revenue unless the payment to the customer is in exchange for a distinct good or service (IFRS 15.70).

Discounts are allocated to all of the performance obligations, based on their relative stand alone selling prices. The stand alone selling price is the price at which an entity would sell a promised good or service separately to a customer (IFRS 15.77).

Consideration
The consideration allocated to the coupon is presented as “refund liability” in the balance sheet, and it is measured at the relative stand alone selling price of the coupon.

The face value of the coupon to the customer is €2. The face value is adjusted by the proportion of coupons expected to be redeemed (50%), so the relative stand alone selling price is 1 ( 2 × 50%).

A portion of the cash received [20,000 (€20 × 1,000)] is allocated to revenue (20,000/21,000 = €19,048) and a portion to the refund liability (€952).

As the end customers redeem the coupons, the retailer reclaims cash from the manufacturer, and the refund liability is reduced accordingly.

Case – Customer incentives – Coupons in local paper

Chez Aurelie , an upmarket boutique, buys all of its inventory of children’s dresses from KidCo , a local manufacturer. The following end customer discount arrangements are made:

  • Coupons are issued directly by KidCo to end customers via a local newspaper; the coupon’s face value amounts to €10 and the coupon is valid until the end of the following month.
  • Coupons can be redeemed by the end customer only at Chez Aurelie.
  • Chez Aurelie submits redeemed coupons to KidCo for full reimbursement.
  • Using the expected value method, KidCo expects the coupons to be used for 40% of sales from the inventory sold to Chez Aurelie.

Chez Aurelie bought 1,000 dresses at a €100 unit price from KidCo , and sold them all to the end customer during the coupon validity period at €120.

How much revenue should be recognised by KidCo and Chez Aurelie?

The rules

An entity should account for consideration payable to a customer as a reduction of the transaction price and, therefore, of revenue, unless the payment to the customer is in exchange for a distinct good or service (IFRS 15.70).

Discounts are allocated to all of the performance obligations, based on their relative stand alone selling prices. The stand alone selling price is the price at which an entity would sell a promised good or service separately to a customer (IFRS 15.77).

Consideration

a) Revenue recognition

KidCo = €100,000 − €4,000 = €96,000 (total sales to Chez Aurelie , less estimated coupon redemption)

Chez Aurelie = €120,000 (total sales, irrespective of coupon redemption)

The additional consideration paid by KidCo (the consumer products entity) is revenue to the retailer, because the fair value of the total consideration received by the retailer is €120. The cost of sales remains at the original amount paid by the retailer of €100.

b) Accounting entries

At the time of initial sale from KidCo to Chez Aurelie and issue of coupons

Kidco

Dr. Cash (B/S)

€100,000

Cr. Refund liability (B/S)

€4,000

Cr. Products sales (P/L)

€96,000

Chez Aurelie

Dr. Inventory (B/S)

€100,000

Cr. Cash (B/S)

€100,000

At the time of end customer purchase

Chez Aurelie

Dr. Receivable from KidCo (B/S)

€4,000

Dr. Cash (B/S)

€116,000

Cr. Products sales (P/L)

€120,000

Dr. Cost of sales (P/ L)

€100,000

Cr. Inventory (B/S)

€100,000

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Something else -   Breach of Contract

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IFRS 15 Consumer products IFRS 15 Consumer products IFRS 15 Consumer products IFRS 15 Consumer products IFRS 15 Consumer products IFRS 15 Consumer products IFRS 15 Consumer products IFRS 15 Consumer products IFRS 15 Consumer products IFRS 15 Consumer products IFRS 15 Consumer products IFRS 15 Consumer products IFRS 15 Consumer products IFRS 15 Consumer products IFRS 15 Consumer products

IFRS 15 Consumer products IFRS 15 Consumer products IFRS 15 Consumer products IFRS 15 Consumer products IFRS 15 Consumer products IFRS 15 Consumer products IFRS 15 Consumer products IFRS 15 Consumer products IFRS 15 Consumer products IFRS 15 Consumer products IFRS 15 Consumer products IFRS 15 Consumer products IFRS 15 Consumer products IFRS 15 Consumer products IFRS 15 Consumer products

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