Retailers often provide various incentives to their customers, for example, discount coupons, price match guarantees and lucky draws. This articles considers the application of IFRS 15 on the amount and timing of revenue recognised when retailers provide incentives to their customers.
Discount coupons
When discount coupons are issued with a sale, under IFRS 15, the retailer is considered to have sold two things:
- The goods or services, and
- Right to a free or discounted good or service in the future.
Example – Discount coupons off the next purchase
A Customer purchases $100 worth of goods from Retailer D on 29 June 2018 and they receive a coupon for a 50% discount off their next purchase to the value of $25. The coupon expires on 29 September 2018.
Question
How should Retailer D account for the sale? The retailer typically achieves a 60% gross margin so even if the voucher is used, the retailer will be making profit.
Answer
Under IFRS 15, Retailer D has sold two things:
- Goods to the value of $100, and
- A discount voucher.
Retailer D needs to determine the standalone selling price of the discount voucher. Assume that Retailer D estimates the likelihood that the customer will use the coupon is 80%, the standalone selling price is $20 ($25 x 0.80).
| Contract components | Standalone selling price | Revenue |
| Goods | $100 | $83 ($100x($100/$120)) |
| Discount voucher | $20 | $17 ($100x($20/$120)) |
| $120 | $100 |
Retailer D would recognise revenue of $83 on sale of the goods on 29 June 2018, and recognise $17 revenue when the customer redeems the voucher. The journal entry on initial sale would be:
| DR | CR | |
| Dr Cash | $100 | |
| CR Sales | $83 | |
| CR Discount voucher liability | $17 |
If Retailer D does not have sufficient history to estimate the percentage of redemptions, then it may need to assume 100% redemption i.e. the standalone selling price of the voucher will be $25 (resulting in a larger proportion of revenue being delayed) to ensure that it is highly probable that revenue recognised will not reverse in future.
The common practice today is to recognise $100 revenue on sale of the goods. When the customer uses the discount voucher, revenue is recognised on the discounted amount.
| Revenue Recognition | |||
| 30 June 2018 | 30 June 2019 | Total | |
| IFRS 15 | |||
| Sales revenue | $83 | - | $83 |
| Sales revenue from discount voucher | - | $17 | $17 |
| Total | $83 | $17 | $100 |
| IAS 18 | |||
| Sales revenue | $100 | - | - |
Practical implication on systems and processes
Some of the practical implications on systems and processes for Retailer D include:
- Identifying that there are two performance obligations
- Determining the value of the coupon
- Spitting sale into its 2 components
- Releasing the deferred revenue when the coupon is presented
- Releasing the deferred revenue when the coupon expires
- Estimating the percentage of customers that will use the coupons
- Estimating the average amount of the discount that would be claimed by the customer
- Systems to apportion and defer revenue.
Price match guarantees
Under IFRS 15, revenue is recognised at the amount you expect to receive from the customer. When a portion of revenue is subject to reversal, revenue is only recognised at the amount that would not be subject to significant reversal. This could result in recognising an amount less than the transaction price.
Example – Price match guarantee
Question
Retailer E provides a price match guarantee for its customers. If the customer finds a lower price for the product from any of Retailer E’s competitors in the three months following the sale, Retailer E will pay the customer the difference between the sale price and that lower price. A customer purchased a product for $200 from Retailer E, and on a probability-weighted basis, Retailer E estimates it will reimburse the customer $10. How should Retailer E account for the sale?
Answer
The amount that Retailer E expects to repay to the customer needs to be excluded from the sale and recorded as a liability. Retailer E would book the following journal entries:
| DR | CR | |
| Dr Cash | $200 | |
| CR Sales | $190 | |
| CR Liability | $10 |
The $10 is only recognised as revenue when it is highly probable that Retailer E will not have to reimburse the customer.
The common practice today is to recognise $200 revenue on sale.
| Revenue Recognition | |||
| 30 June 2018 | 30 June 2019 | Total | |
| IFRS 15 | |||
| Sale revenue | $190 | - | $190 |
| Price match guarantee | - | $10 | $10 |
| Total | $190 | $10 | $200 |
| IAS 18 | |||
| Sale revenue | $200 | - | - |
Practical implication on systems and processes
Some of the practical implications on systems and processes for Retailer E include:
- Collecting data on competitor’s prices
- Estimating the price likely to be paid out
- Estimating the percentage of customers that will claim the guarantee
- Systems to apportion revenue between the 2 performance obligations at point of sale
- System to release the deferred revenue.
Lucky draws
To promote certain products, it is not uncommon for manufacturers to offer customers the chance to enter into a draw for a big prize, e.g. a holiday or a car, when they buy a particular product. Under IFRS 15, it is likely that providing a ‘free’ chance to enter into a lucky draw would be accounted for as a separate performance obligation.
Example – Lucky draws
To promote its latest range of Italian cookware, XYZ Co offers customers who buy $100 worth of XYZ Italian cookware range a chance to go into a draw for a holiday to Italy worth $50,000. Customers will get a form to fill in when they make purchases over $100. They will need to fill in the form and drop it into the lucky draw boxes in store, or submit the form online. XYZ Co estimates that 5,000 customers will be eligible for the draw. It estimates that 70% of those customers will submit the lucky draw form.
Customer A purchased $120 worth of goods and gets a lucky draw form.
Question
How should XYZ Co account for the sale?
Answer
The standalone selling price of each of the lucky draw forms is $7 ($50,000/5,000x70%).
| Contract components | Standalone selling price | Revenue |
| Goods | $120 | $113 ($120 x ($120/$127)) |
| Lucky draw form | $7 | $7 ($120 x ($7/$127)) |
| $127 | $120 |
Journal entry to record the sale is:
| DR | CR | |
| DR Cash | $120 | |
| CR Revenue | $113 | |
| CR Deferred liability | $7 |
Deferred liability is released to revenue when the holiday is given away.
Current practice
Under IAS 18 today, common practice would be to recognise $120 as revenue, and a separate provision for the holiday.
Practical implication on systems and processes
Some of the practical implications on systems and processes for XYZ Co include:
- Systems to determine the standalone selling price of each lucky draw form/ticket
- Systems to split the revenue at the point in sale.
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