IFRS 15 Volume discounts and Margin guarantees

IFRS 15 Volume discounts and Margin guarantees – Volume discounts

To entice customers to buy/order more goods, it is not uncommon for wholesalers to provide customers with volume discounts/rebates. Under IFRS 15, volume discounts/rebates is a type of variable consideration. [IFRS 15 50 – 59] IFRS 15 Volume discounts and Margin guarantees

Wholesalers are to record revenue at the amount it expects to receive (net of discounts/rebates). This means that wholesalers will recognise revenue at the average expected price per unit – by estimating the total expected sales volume and the total sales expected revenue (after deducting discount/rebates). IFRS 15 Volume discounts and Margin guarantees

The case – Volume discounts IFRS 15 Volume discounts and Margin guarantees

Background IFRS 15 Volume discounts and Margin guarantees

On 1 June 2019, Tissues Co signed a one year contract with Retailer X to supply boxed tissues for the following prices:

Sale volume	Price/Box of tissues
0 – 100,000 boxes	$10
100,001 – 200,000 boxes	$9
over 200,001	$8

Based on past experience, Tissue Co estimates total sales volume will be 150,000 boxes of tissues per annum. IFRS 15 Volume discounts and Margin guarantees

Question IFRS 15 Volume discounts and Margin guarantees

As at 30 June 2019, Tissues Co has sold 30,000 boxes of tissues. How much revenue does Tissues Co recognise?

Calculations: IFRS 15 Volume discounts and Margin guarantees

– Expected variable consideration/sales price per box based on 150,000 sales volume IFRS 15 Volume discounts and Margin guarantees

1st tranche: 0 – 100,000 boxes – 100,000 boxes @ $10/box	$1,000,000
2nd tranche: 100,001 – 200,000 boxes – 500,000 boxes @ $9/box	$450,000
Total for 150,000 boxes of estimated sales volume	$1,450,000

Average price for the estimated sales volume of 150,000 boxes is: IFRS 15 Volume discounts and Margin guarantees

$1,450,000 / 150,000 = $9.67/box IFRS 15 Volume discounts and Margin guarantees

The journal entry to record sales of 30,000 boxes of tissues is: IFRS 15 Volume discounts and Margin guarantees

Trade accounts receivable – 30,000 boxes @ $10	$300,000
Revenue – 30,000 boxes @ $9.67		$290,100
Contract liability – Expected sales discount		$9,900

Effect IFRS 15 versus IAS 18 IFRS 15 Volume discounts and Margin guarantees

	IFRS 15	IAS 18
Revenue	$290,100	$300,000
Contract liability	$9,900	–

Here it shows that one of IFRS 15’s objectives is to show revenue more prudent compared to IAS 18 in interim periods.

Version 1 – Year-end accounting IFRS 15 Volume discounts and Margin guarantees

At year-end the sales to Retailer X were 155,000 boxes, slightly over the original estimate of 150,000. Because the actual sales remained in the 2nd tranche the sales price and revenue do not have to be adjusted, the $9.67 estimated sales price is also the actual sales price to Retailer X for the year.

In the accounts each balance at year-end is as follows (ignoring payments received from the customer): IFRS 15 Volume discounts and Margin guarantees

Trade accounts receivable: 155,000 boxes @ $10 =	$1,550,000
Contract liability – Expected sales discount 155,000 boxes @ ($10 – $9.67) =		$51,150
Revenue: 155,000 boxes @ $9.67 =		$1,498,850

Actual revenue should be: IFRS 15 Volume discounts and Margin guarantees

100,000 boxes @ $10	$1,000,000
55,000 boxes at $ 9	$495,000
Total revenue in the period is	$1,495,000

The year-end journal entry to reverse the contract liability – Expected sales discount and record the final revenue amount for the period is as follows:

Contract liability – Expected sales discount	$51,150
Revenue ($1,498,850 -/- $1,495,000)	$3,850
Trade accounts receivable ($1,495,000 -/- $1,550,000)		$55,000

Version 2 – Q3 Period end accounting IFRS 15 Volume discounts and Margin guarantees

At the end of Q3 the sales to Retailer X were 175,000 boxes. In the Q3 close for interim reporting to the stock exchange Tissue Co re-estimates total sales volume to 245,000 boxes of tissues per annum for this year. IFRS 15 Volume discounts and Margin guarantees

As a result the expected variable consideration/sales price per box has to be determined based on 245,000 sales volume

1st tranche: 0 – 100,000 boxes – 100,000 boxes @ $10/box	$1,000,000
2nd tranche: 100,001 – 200,000 boxes – 100,000 boxes @ $9/box	$900,000
3rd tranche: over 200,000 – 45,000 boxes @ $8/box	$360,000
Total for 245,000 boxes of estimated sales volume	$2,260,000

Average price for the changes estimated sales volume of 245,000 boxes is: IFRS 15 Volume discounts and Margin guarantees

$2,260,000 / 245,000 = $9.22/box adjusted sales price IFRS 15 Volume discounts and Margin guarantees

In the accounts each balance at the end of Q3 is as follows (ignoring payments received from the customer): IFRS 15 Volume discounts and Margin guarantees

Trade accounts receivable: 175,000 boxes @ $10 =	$1,750,000
Contract liability – Expected sales discount 175,000 boxes @ ($10 – $9.67) =		$57,750
Revenue: 175,000 boxes @ $9.67 =		$1,692,250

Actual revenue up to the end of Q3 should be: IFRS 15 Volume discounts and Margin guarantees

175,000 boxes @ $9.22

$1,613,500

The Q3 journal entry to reverse the contract liability – Expected sales discount in part and record the adjusted revenue amount for the period to Q3 is as follows:

Contract liability – Expected sales discount	$57,750
Revenue ($1,613,500 -/- $1,692,250)	$78,750
Trade accounts receivable ($1,613,500 -/- $1,750,000)		$136,500

Version 2 – Q4 Transaction accounting IFRS 15 Volume discounts and Margin guarantees

The sales price in Q4 has been adjusted to the above calculated amount of $9.22/box. For each sale of 1 box the journal entry would be: IFRS 15 Volume discounts and Margin guarantees

Trade accounts receivable: 1 box @ $9.22 =	$9.22
Revenue: 1 box @ $9.22 =		$9.22

See next section for an explanation.

Version 2 – Q4 Year end accounting

Because the sales discount is in its upper tranche (lowest sales price), using the above Q4 Transaction accounting journal entry removes the need to make a year end adjustment. If more tranches with discounts on the sales price would be available, the calculations are similar to the Q3 Period end accounting and Version 1 year end accounting.

IFRS 15 Volume discounts and Margin guarantees – Profit margin guarantees

It is not uncommon for wholesalers to provide retailers with a profit margin guarantee to compensate the retailer for any price mark-down promotions to boost sales volumes. Profit margin guarantees will see wholesalers refunding retailers a portion of the sales revenue if the retailer has not met its minimum sales margin. Under IFRS 15, these guarantees are considered to be a form of variable consideration. This means that if the wholesaler expects that a portion of the sales amount will be refunded back to its customer, the wholesaler would be recognising revenue at an amount less than the selling price. [IFRS 15 50 – 59]

The case – Profit margin guarantees

As at reporting date, JC Shoe Co sold shoes to Retailer M&S for $2,000,000. JC Shoe Co refunds a portion of its sales at the end of each season if Retailer M&S has not met its minimum sales margin.

Based on past experience, JC Shoe Co refunds on average approximately 15% of the invoiced amount.

Question

How much revenue should JC Shoe Co recognise?

Calculation:

JC Shoe Co should recognise revenue of $1,700,000 ($2,000,000 – ($2,000,000 x 15%)).

The journal entry is:

Trade accounts receivable	$2,000,000
Contract liability – Estimated sales discount		$300,000
Revenue		$1,700,000

Effect IFRS 15 versus IAS 18

	IFRS 15	IAS 18
Revenue	$1,700,000	$2,000,000
Contract liability	$300,000	–

Here it shows that one of IFRS 15’s objectives is to show revenue more prudent compared to IAS 18 in interim periods.

Year-end accounting

JC Shoe Co contacts its Retailer M&S to obtain evidence on the sales margin realised in the year closed recently. The point of sales systems (consolidated) at Retailer M&S shows the following results on the shoes bought from JC Shoe Co:

Retailer M&S – POS data	Realised	Target	Difference
Sales JC Shoe Co branded shoes	$10,500,250
Cost of sales	$4,725,110
Gross margin	$5,775,140
Gross margin in sales	55.00%	56.50%	1.50%

To provide Retailer M&S with the guaranteed gross margin of 56.50% JC Shoe Co has to issue a credit note of:

Minimum sales margin 56.50% of $10,500,250 is $5,932,650 minus $5,775,140 is $157,510 (rounded), or 1.50% of $10,500,250 is $157,510 (rounded).

IFRS 15 Volume discounts and Margin guarantees