IFRS 15 Retail – the finest perfect examples

IFRS 15 Retail revenue – finest perfect examples

Retail is the process of selling consumer goods or services to customers through multiple channels of distribution to earn a profit. Retailers satisfy demand identified through a supply chain. The term “retailer” is typically applied where a service provider fills the small orders of many individuals, who are end-users, rather than large orders of a small number of wholesale, corporate or government clientele. (Source: Wikipedia)

So what is the IFRS 15 guidance for retail?

Here are the cases covering the most significant accounting topics for retail in IFRS 15.


Case – Customer incentives Buy three, get coupon for one free

Death By Chocolate Ltd, a high street chain, is offering a promotion whereby a customer who purchases three boxes of chocolates at €20 per box in a single transaction in a store receives an offer for one free box of chocolates if the customer fills out a request form and mails it to them before a set expiration date.

Death By Chocolate estimates, based on recent experience with similar promotions, that 80% of the customers will complete the mail in rebate required to receive the free box of chocolates.

How is a ‘buy three, get one free’ transaction accounted for and presented by Death By Chocolate?

The rules

IFRS 15.22 states: “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 either:IFRS 15 Retail

  1. a good or service (or a bundle of goods or services) that is distinct; or
  2. a series of distinct goods or services that are substantially the same and that have the same pattern of transfer to the customer (see paragraph 23).”

IFRS 15.26 provides examples of distinct goods and services, including “granting options to purchase additional goods or services (when those options provide a customer with a material right, as described in paragraphs B39-B43)”.

IFRS 15.B40: “If , in a contract, an entity grants a customer the option to acquire additional goods or services, that option gives rise to a performance obligation in the contract only if the option provides a material right to the customer that it would not receive without entering into that contract (for example, a discount that is incremental to the range of discounts typically given for those goods or services to that class of customer in that geographical area or market).

If the option provides a material right to the customer, the customer in effect pays the entity in advance for future goods or services and the entity recognises revenue when those future goods or services are transferred or when the option expires”.

Here is how this works out!

The purchase of three boxes of chocolates gives the customer the right to the fourth box for free. This is a material right which is accounted for as a separate performance obligation. An element of the transaction price would be allocated to the material right using the relative stand alone selling price, which considers estimated redemptions.

The value of the option would be €16 (€20 × 100% discount × 80% expected redemption). Management would allocate 12.63 (€60 (transaction price for three boxes at €20 each) × (€16 / (€16 + €60))) of the transaction price to the mail in rebate.

Death By Chocolate would recognise revenue of €47.37 when control of the three boxes of chocolates transfers. Management would allocate €12.63 to the undelivered box and recognise revenue on delivery.

The expected breakage amount is recognised as revenue in proportion to the pattern of rights exercised by the customer If Death by Chocolate is unable to determine the number of mail in rebates that will be used, management might assume 100% redemption, to ensure that it is not highly probable that there will be a significant reversal of revenue.


Case – Customer incentives – Discount coupons

LA, a clothing retailer, has launched a promotional campaign whereby a coupon is published in a national newspaper giving a discount of 5% off for any purchase over €50 in any of LA’s stores.

LA’s margin on similar transactions, prior to the impact of the coupons, is between 30% and 40%. Therefore , there is no risk of creating an onerous arrangement between the retailer and the customer’.

How does a retailer account for these coupons?

The rules

IFRS 15.9 states: “An entity shall account for a contract with a customer that is within the scope of this Standard only IFRS 15 Retailwhen all of the following criteria are met:
a. the parties to the contract have approved the contract (in writing, orally or in accordance with other customary business practices) and are committed to perform their respective obligations…”

IFRS 15.10: “A contract is an agreement between two or more parties that creates enforceable rights and obligations.”

Here is how this works out!

The simple issuance of the coupons does not create a binding contract with a customer. This only occurs once the customer makes the purchase exceeding €50. LA should not recognise a liability in its financial statements for the distribution of coupons.

LA should account for discount coupons as an adjustment to the transaction price only when the customers redeem them.


Case – Customer incentives – Discount coupons / free products rebate

DressCo is a high street retailer and has launched a promotional campaign with the following elements:

  • discount coupons are provided to any customers that purchase goods with a total value of over €5,000. The discount coupons entitle the customer to an additional 50% till discount on selected items during the 90 days immediately following the campaign;
  • DressCo has issued 60 of the 50% coupons to high-spending consumers and took from them €100,000 at the till during the campaign; and
  • based on historical trends, management expects that:
    • 75% of the end-consumers receiving 50% discount coupons will use the coupon;
    • customers using the coupons will spend on average €1,000 at the till; and
    • It will still make a positive margin on the transactions when the coupons are used.

How should DressCo account for the discount coupon issued to customers?

The rules

IFRS 15.26: “Depending on the contract, promised goods or services may include, but are not limited to, the following:

j) granting options to purchase additional goods or services (when those options provide a customer with a material right, as described in paragraphs B39–B43).”

According to paragraphs B40, B41 and B42 of IFRS 15:

“B40 If, in a contract, an entity grants a customer the option to acquire additional goods or services, that option gives rise to a performance obligation in the contract only if the option provides a material right to the customer that it would not receive without entering into that contract (for example, a discount that is incremental to the range of discounts typically given for those goods or services to that class of customer in that geographical area or market).

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If the option provides a material right to the customer, the customer in effect pays the entity in advance for future goods or services and the entity recognises revenue when those future goods or services are transferred or when the option expires.

B41 If a customer has the option to acquire an additional good or service at a price that would reflect the stand-alone selling price for that good or service, that option does not provide the customer with a material right even if the option can be exercised only by entering into a previous contract. In those cases, the entity has made a marketing offer that it shall account for in accordance with this Standard only when the customer exercises the option to purchase the additional goods or services.

B42 Paragraph 74 requires an entity to allocate the transaction price to performance obligations on a relative stand-alone selling price basis. If the stand-alone selling price for a customer’s option to acquire additional goods or services is not directly observable, an entity shall estimate it. That estimate shall reflect the discount that the customer would obtain when exercising the option, adjusted for both of the following:

  • any discount that the customer could receive without exercising the option; and
  • the likelihood that the option will be exercised.”

Here is how this works out!

DressCo has sold dresses for a total amount of €100,000, and it has simultaneously granted to its customers 50% off coupons, that will be used in future purchases by an estimated 75% of customers. The discount coupons represent a material right to the end-customers. Hence, these are two separate performance obligations.

DressCo has decided to use the portfolio approach, on the basis that it reasonably expects that the effects on the financial statements would not differ materially from applying IFRS 15 to the individual contracts.

Determination of the stand-alone selling price of the options as a portfolio:

50% discount coupons = net price of additional products × discount × ”likelihood”IFRS 15 Retail

= €1,000 × 60 × 50% × 75%

= €15,000

Allocation of the transaction price:

Total value of the transactions = price of initial purchase + option value granted

= €100,000 + €15,000

= €115,000

The transaction price is allocated to the material right, based on the relative stand-alone selling price.

Transaction price = €100,000

Transaction price allocated to the discount coupons = €15,000/€115,000 × €100,000

= €13,040

Accounting entries at initial purchase:

Dr. Cash (B/S)

€100,000

Cr. Product sales (P/L)

€86,960

Cr. Contract liability – discount coupons (B/S)

€13,040

Accounting entries at redemption/2nd purchase of coupons:

Dr. Cash (B/S) (50% of €1,000 × 45)

€22,500

Cr. Products sales (P/L)

€35,540

Dr. Contract liability – discount coupons (B/S)

€13,040

If Dress Co is unable to determine the number of coupons that will be exercised, management would assume 100% redemption (as opposed to 75% illustrated above), to ensure that it is not highly probable that there will be a significant reversal of revenue.

Breakage estimates would usually be updated at each period-end, and adjustments would be made where necessary.

If Dress Co expects to be entitled to a breakage, it should also recognise breakage revenue in proportion to the pattern of rights exercised by the customer (that is, redemption of the coupons). If Dress Co is unable to determine the number of coupons that will be exercised, management would assume 100% redemption, and it would recognise the breakage amount as revenue when the likelihood of the coupon redemption becomes remote.

Breakage estimates would usually be updated at each period-end, and adjustments would be made where necessary.


Case – Loyalty programs

  • FabricKs operates retail stores and a website where customers can buy dresses.
  • There is a customer loyalty program in place, awarding customers 1 point for every €1 spent on buying dresses.
  • Points are only redeemable for €0.10 off future purchases and cannot be redeemed for cash.
  • FabricKs expects 5% of points to expire unredeemed, based on historical trends.
  • FabricKs has sold dresses for €1,000 during the period.

How should FabricKs account for the loyalty program?

The rules

IFRS 15.26: “Depending on the contract, promised goods or services may include, but are not limited to, the following

: …

(i) granting options to purchase additional goods or services (when those options provide a customer with a material right, as described in paragraphs B39–B43).”

An option gives rise to a material performance obligation in the contract only if the option provides a material right to the customer that it would not receive without entering into that contract (IFRS 15.B40).

The allocation of transaction price to performance obligations is to be undertaken on a relative stand-alone selling price basis (IFRS 15.74).

Reference is also made to example IFRS 15.B52 – Customer loyalty programme.

Here is how this works out!

The transaction involves the retailer committing to two performance obligations: the good purchased; and the rights related to the loyalty points. FabricKs has decided to use the portfolio approach, on the basis that it reasonably expects that the effects on the financial statements would not differ materially from applying IFRS 15 to the individual contracts.

Determination of the stand-alone selling price of the option:IFRS 15 Retail

Total discount on future purchases = discount × loyalty points awarded

= €0.1 × 1,000 = €100

Stand-alone selling price = total discount on future purchases – expected breakage of points

= €100 – (5% × 1,000 x €0.10) = €95

Allocation of the transaction price:

FabricKs has to allocate customer payments of €1,000 between products sales and loyalty points, based on their relative stand-alone selling prices.

Total transaction value = price of initial purchase + option value granted

= €1,000 + € 95 = €1,095

Customer payment allocated to the loyalty program = €1,000 × €95 / €1,095 = €87

Customer payment allocated to the products sales = €1,000 × €1,000 / €1,095 = €913

Accounting entries at initial purchase:

Dr. Cash (B/S)

€1,000

Cr. Products Sales (P/L)

€913

Cr. Contract Liability – Loyalty points (B/S)

€87

If management can reasonably estimate breakage, it would recognise revenue for the breakage in the same pattern that it recognises revenue for the points redeemed. If FabricKs is unable to determine the number of points that will be used, management might assume 100% redemption, to ensure that it is not highly probable that there will be a significant reversal of revenue.

In this case, management would recognise the revenue allocated to the points on redemption, on expiration of the rebate or when it is able to true up its estimate of breakage.


Case – Gift cards

Woolly has launched a campaign of selling gift cards for the upcoming holiday season:

  • Gift cards are valid for up to one year from the date of purchase and only at Woolly outlets; furthermore, the customer cannot obtain a cash reimbursement for unspent amounts or unused cards. Unspent amounts after a year are kept by the company.
  • Woolly expects 10% of the gift card’s value to expire unused, based on historical trends.
  • Woolly has no obligation to remit unused gift card amounts to end-customers or to a third party (for example, government).

60 end-consumers purchase €100 gift cards on 30 August.

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Should Woolly recognise revenue on the sale of gift cards or on their redemption? How should “breakage” be accounted for?

The rules

A customer’s non refundable prepayment to an entity gives them a right to receive a good or service in the future. However, customers might not exercise all of their contractual rights, which are often referred to as “breakage” (IFRS 15.B45 ).

The entity should recognise a contract liability (and not revenue) for any consideration received that is attributable to a customer’s unexercised rights. Additionally, if the entity expects to be entitled to a breakage amount, it recognises the expected breakage amount as revenue in proportion to the pattern of rights exercised by the customers (IFRS 15.B 46-B 47).

Here is how this works out!

Revenue recognition occurs on redemption of gift cards by a consumer in relation to products sold. Woolly also expects to be entitled to breakage revenue. In estimating breakage, Woolly has assessed that it has adequate historical information to recognise breakage revenue in proportion to the pattern of rights exercised by the customer.

In making this assessment it has determined that recognising 10% breakage would result in recognition of only that amount of revenue that is not highly probable of a significant reversal. Woolly has decided to use the portfolio approach on the basis that it reasonably expects that the effects on the financial statements would not differ materially from applying IFRS 15 to the individual contracts.

For €6,000 worth of gift cards, the total breakage estimate is €600. The expected value to be used is €5,400. Before the 31 December year-end, end-customers purchase €3,600 of product using the gift cards. Woolly should recognise the following:

Sales = €3,600 (reflecting the product’s selling price)

Breakage revenue = Gift card used value / Gift card expected value to be used × Total breakage revenue

= (€3,600 / €5,400 * €600) = €400

Accounting entries at time of gift card purchase:

Dr. Cash (B/S)

€6,000

Cr. Contract Liability – Gift Card (B/S)

€6,000

Accounting entries at 31 December 3 600

Dr. Contract Liability Gift Card (B/S)

€4,000

Cr. Products Sales (P/L)

€3,600

Cr. Breakage Revenue (P/L)

€400

Note: breakage estimates would usually be updated at each period-end, and adjustments would be made where necessary.

This solution is applicable for prepaid cards with an expiry date. For prepaid cards with no expiry date, an element of the breakage might need to be deferred for a longer period.


Case – Right of return

All sales made by Stripeys include a right of return.

  • Stripeys sells 100 shirts for €100 each.
  • The shirts cost Stripeys €50 each to buy.
  • End customers can return the shirts, as new and in original packaging, within 28 days from the date of purchase for a full refund, provided that they are unused and saleable as new.
  • Based on historical patterns, Stripeys has estimated that the probability weighted expected value of returns is 10% of revenues.
  • Stripeys does not expect to incur any costs to accept the return of the shirts, because the end consumer will return shirts directly to the store.

How should Stripeys record revenue and expected returns associated with this transaction?

The rules

The guidance on «Sale with a right of return» is covered in paragraphs B20+B27 of IFRS 15.

IFSR 15.B20: “ In some contracts, an entity transfers control of a product to a customer and also grants the customer the right to return the product for various reasons (such as dissatisfaction with the product) and receive any combination of the following:

  1. a full or partial refund of any consideration paid;
  2. a credit that can be applied against amounts owed, or that will be owed, to the entity; and
  3. another product in exchange

IFSR 15.B25 : “An asset recognised for an entity’s right to recover products from a customer on settling a refund liability shall initially be measured by reference to the former carrying amount of the products (for example, inventory) less any expected costs to recover those products (including potential decreases in the value to the entity of returned products).

At the end of each reporting period, an entity shall update the measurement of the asset arising from changes in expectations about products to be returned. An entity shall present the asset separately from the refund liability.”

In addition, it is important to take into consideration the guidance in paragraph B26 of IFRS 15: “Exchanges by customers of one product for another of the same type, quality, condition and price (for example, one colour or size for another) are not considered returns for the purposes of applying this Standard”

Moreover, paragraph B27 of IFRS 15 confirms that “C ontracts in which a customer may return a defective product in exchange for a functioning product shall be evaluated in accordance with the guidance on warranties in paragraphs B28 B33.”

Here is how this works out!

Stripeys estimates that 10 shirts will be returned. Furthermore, Stripeys has concluded that it is highly probable that there will not be a significant reversal of revenue recognized, based on this estimate, when the uncertainty is resolved (that is, once the return period has expired).

a) At the time of sale, Stripeys should recognisethe following:

products sales = (Total shirts sold – expected returns) × Selling price

= (100 – 10) × €100

= €9,000

Cost of sales = €4,500 {(100 – 10) × €50}

Asset for anticipated return = Cost of shirts x expected return

= €500 (€50 × 10)

Liability for customer refund = Selling price of shirts x expected return

= € 1,000 (€100 × 10)

b) Accounting entries

At the time the sale occurs:

Revenue recognition

Dr. Cash (B/S)

€10,000

Cr. Products Sales (P/L)

€10,000

Dr. Products Sales (P/L)

€1,000

Cr. LiabilityCustomer refund (B/S)

€1,000

Cost of sales

Dr. Cost of sales (P/L)

€5,000

Cr. Inventory (B/S)

€5,000

Dr. Asset for anticipated return (B/S)

€500

Cr. Cost of sales (P/L)

€500

On return of the products:

Dr. LiabilityCustomer refund (B/S)

€1,000

Cr. Cash (B/S)

€1,000

Dr. Inventory (B/S)

€500

Cr. Asset for anticipated return (B/S)

€500

Note: Estimate of return probability is to be evaluated at each period-end. Any change is to be adjusted against asset and liability, with these being recognised against cost of sales and revenue respectively.


Case – Price protection

Skirtz Ltd has a price protection policy in place for all sales:

  • Reimbursement is for the difference between the purchase price and the lower price offered by direct competitors.
  • The reimbursement is restricted to the three month period following date of sale.
  • Skirtz Ltd has used the expected value approach to estimate that the reimbursement is expected to be an average of 5% of sales.

Skirtz Ltd made sales of 1,000.

How should Skirtz Ltd account for the potential refund?

The rules

IFRS 15.50: “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.

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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.”

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

According to paragraph 56 of IFRS 15, the transaction price should include 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.

Here is how this works out!

The price protection arrangement represents variable consideration. The transaction price should be estimated and constrained to the amount that would result in an amount of revenue that is highly probably of not reversing.

Skirtz Ltd recognises revenue for sales to the retailer at a transaction price that is reduced by the estimated potential refund to the customer. The difference between the cash selling price and the transaction price is recorded as a liability for cash consideration expected to be paid to the end-customer.

Assuming sales of €1,000 and a probable refund percentage of 5%, the following should be recognised by Skirtz Ltd:

Sales = €950 (€1,000 − €50 refund liability)

Refund liability = €50 (€1,000 × 5% probable customer refund)

Accounting entries

At the time of the sale

Dr. Cash (B/S)

€1,000

Cr. Products Sales (P/L)

€950

Cr. Liability – Refund (B/S)

€50

At the time of the cash reimbursement

Dr. Liability – Refund (B/S)

€50

Cr. Cash (B/S)

€50

Skirtz Ltd will update its estimate at each reporting period until the refund is made or the three-month period has passed.


Case – Internet sales / e-commerce accounting

An end-consumer decides to buy clothes directly on the website of a high street chain, Bouvry & Co. Full payment is made immediately on-line.

The website proposes delivery to the end-consumer’s home for an additional fee. Alternatively, the end-consumer can collect her purchases from any one of the chain’s retail stores.

Wherever possible, and in this case, the sale is honoured by Bouvry & Co using the store’s inventory which is put aside immediately following the sale.

Customer A opts for store pick-up, and goes to the selected store to pick up the clothes one week after the payment is made. The original purchase and the final pick-up are in different reporting periods of Bouvry& Co.

Customer B opts for delivery to their home for the additional fee.

When should the revenue be recognised by Bouvry & Co?

The rules

Bill-and-hold arrangements are discussed in paragraphs B79–B81 of IFRS 15. They 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 recognised when control of the goods transfers to the customer.

Paragraph B81 of IFRS 15 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:

“ a) the reason for the bill-and-hold arrangement must be substantive (for example, the customer has requested the arrangement);
b) the product must be identified separately as belonging to the customer;
c) the product currently must be ready for physical transfer to the customer; and
d) the entity cannot have the ability to use the product or to direct it to another customer”.

Here is how this works out!

Customer A − Bouvry & Co is able to recognise revenue, because the product has been set aside, is available at the pick-up location and can not be used for another customer.

If goods need to be delivered from the warehouse, the bill-and-hold criteria will not be met until the store has received the products ordered by the end-consumer. Consideration might also need to be given to a “returns” estimate, that could include goods that are never claimed.

Customer B − Revenue is recognised when control of the products is transferred. Although Customer B has paid for the asset at the time of purchase, they do not have the ability to direct the use of the asset until it is received. The customer does not have the ability to change the shipping destination.

They do not have physical possession and have not accepted the asset until it is received. These are all indicators that control is transferred when the products are delivered to Customer B.

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