Scenario-4 Joint Promotion arrangements (Supplier & Retailers)

In these cases, supplier (seller) grants price reduction to retailers who at same time offer promotional prices also called ‘Scan deals’. For example a facewash supplier company FW LTD and a retailer Jupiter LTD agree for 3 months all sales of facewash ‘Fresh wash’ a product will be subject to a promotional price.

At the same time promotional campaign of FW LTD shall be correlate the specific period.

FW LTD particular product standard selling price to retailer is 100 USD and end consumer 120 USD.

Both parties agree to reduce the price by 10% applicable only in promotional period sales.

After promotion period FW LTD reports back to supplier unsold items and also reimburses any unearned discount.

How supplier shall recognize revenue?

Ans FW LTD would take into account discount amount in determining transaction price and should consider the discount in determining the transaction price and estimate number of items sold by retailer during that promotion period. The discount of 12 USD (120 USD *10%) per unit is expected to be sold is used as reduction in the selling price therefore the selling price would 88 USD. This however could be reflected in two ways directly reduce from sales or adjust inventory value already held with retailer. Further, revenue to be recognized only to the extent where it is highly probable revenue would not be reversed when items qualifying for discount are finally accounted for. At this amount of revenue recognized will be adjusted to reflect discount given.

Reference to IFRS for understanding

Paragraph 47 of IFRS 15: “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.”

Scenario-5 Compensating retailer due reduction in market price (Price Protection Arrangements)

Under these cases consumer goods company provides compensation for the loss to retailer due to reduction in market price.

  1. JJ’s is a famous dress designer in ladies clothing. As a standard practice to prevent obsolete items getting accumulated in the distribution network it gives markdown compensation on outgoing collection 2 weeks before the new launch.
  2. Star beans a coffee machine vendor new in market. Its model V1.0 was a success however planning to launch V 2.0 therefore decided to provide mark down compensation in order to clear the retail channels. However, V 2.0 would be sold from Star beans website.

Q When and how consumer good companies account for the markdown compensation that they grant retailers?

Ans–  The consumer goods companies should recognize 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.

JJ’s should reduce the transaction price for estimated markdown compensation when it recognizes revenue on shipment of the original batch. Although JJ’s 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 batches. Therefore, JJ’s should account for the compensation following the guidance on variable consideration.

As Star beans 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.

Reference to IFRS for understanding

 Paragraph 50 of IFRS 15: “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 paragraphs 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 paragraphs 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: (a) the entity recognises revenue for the transfer of the related goods or services to the customer; and (b) 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.”

Scenario- 6   Buy two and get one free (Incentive to customers)

  • Tie & Shirt, a famous chain, is offering a promotion whereby a customer who purchases three shirts of pack at the price of 100 USD each in a single transaction in a store receives an offer for one shirt if the customer fills out a request form and mails it to them before a set expiration date
  • Tie & Shirt estimates, based on recent experience with similar promotions, that 60% of the customers will complete the mail-in rebate required to receive the shirt.

How is a ‘buy three, get one free’ transaction accounted for and presented by Tie & Shirt?

Ans– The purchase of pack of three gives right to the fourth shirt 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 60 USD (100 USD x 100% discount x 60% expected redemption). Management would allocate    49.99 USD (300 USD (transaction price for pack of three shirts x 100 each) x (60 USD/ 60+300))) of the transaction price.

   The company would recognize revenue of 250.01 USD when control of three shirts pack is transferred & would allocate 49.01 USD to the remaining shirt and would recognize when delivery takes place.

Reference to IFRS for understanding

Paragraph 22 of IFRS 15 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: a) a good or service (or a bundle of goods or services) that is distinct; or b) 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).”

Paragraph 26 of IFRS 15 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)”.

Paragraph B40 of IFRS 15: “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”.