Free gifts
Free gifts are a separate performance obligation that need to be accounted for separately and a portion of the selling price would have to be allocated to the gift. When revenue on the ‘primary’ performance obligation is recognised over time, this can result in earlier revenue recognition on a portion of the selling price relating to the free gift.
Example – Magazine subscription with a free gift
Background
On 1 June 2018, Mr Y subscribes with Magazine Co for a 12-month magazine subscription for $120 and receives a free watch. The watch is usually sold for $30 and a 12-month magazine subscription for $120.
Question
At reporting date how should Magazine Co account for the sale?
Answer
Under IFRS 15, Magazine Co has sold two things:
- 12-month magazine subscription, and
- A watch.
A portion of the subscription price needs to be allocated to the watch based on the relative standalone selling price.
| Contract components | Standalone selling price | Revenue |
| 12-month magazine subscription | $120 | $96 ($120x($120/$150)) |
| Watch | $30 | $24 ($120x($30/$150)) |
| $150 | $120 |
Magazine Co will recognise $24 when Mr Y initially subscribes for the magazine (and receives the free watch) as sales revenue for the watch, and $96 is deferred and recognised as revenue over the 12-month subscription period.
Current practice under IAS 18
The common practice today is to recognise $120 revenue over the 12-month subscription period and the watch as a cost when Mr Y initially subscribes to the magazine.
| Revenue Recognition | |||
| 30 June 2018 | 30 June 2019 | Total | |
| IFRS 15 | |||
| Watch | $24 | n/a | $24 |
| Magazine subscription | $8 ($96/12x1) |
$88 ($96 /12 X 11) |
$96 |
| Total | $32 | $88 | $120 |
| IAS 18 | |||
| Magazine subscription | $10 | $110 | $120 |
Practical implications on systems and processes
Some of the practical implications on systems and processes for Magazine Co include:
- Identifying that there are two performance obligations
- Working out the standalone selling price of the watch
- System to split out the transaction into its 2 components
- Systems to recognise revenue for the watch
- Systems to recognise revenue and defer the remaining revenue as the magazines are delivered.
Free services
When a retailer offers free services as part of the sale of their product, the service component should be accounted for separately. A portion of the selling price is allocated to the service component and only recognised when the service/maintenance is performed. This would delay revenue recognition on a portion of the selling price.
Example – Free services
Question
On 1 June 2018, a customer buys a bike from Lets-go-bikes for $1,500 and receives 3 free basic services (to be used in the next 12 months). Lets-go-bikes usually charges $75 for a basic bike service. The normal selling price of this bike is $1,500. How should Lets-go-bikes account for the sale?
Answer
A portion of the selling price needs to be allocated to the 3 free services based on the relative standalone selling price.
| Contract components | Standalone selling price | Revenue |
| Bike | $1,500 | $1,304 ($1,500x($1,500/$1,725)) |
| Free service | $225 ($75x3) | $196 ($1,500x($225/$1,725)) |
| $1,725 | $1,500 |
Lets-go-bikes will recognise $1,304 when the bike is sold. $196 is deferred and recognised as revenue as each of the 3 services is performed.
Current practice under IAS 18
The common practice today is to recognise $1,500 revenue on sale of the bike. The cost of each service is expensed when the free serviced is used.
| Revenue Recognition | |||
| 30 June 2018 | 30 June 2019 | Total | |
| IFRS 15 | |||
| Bike | $1,304 | - | $1,304 |
| Free service | - | $196 | $196 |
| Total | $1,304 | $196 | 1,500 |
| IAS 18 | |||
| Bike | $1,500 | - | $1,500 |
Practical implications on systems and processes
Some of the practical implications on systems and processes for Lets-go-bikes include:
- Identifying that there are 4 performance obligations (the bike and 3 services)
- System to split out the transaction into its 4 components on sale of the bike
- Systems to recognise revenue when the service is performed
- System to recognise revenue once the service obligation expires after 12 months (customer does not come back for service).
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