Key points
- Volume rebates and customer loyalty programs are accounted for under AASB 15
- Careful consideration of these are required as they impact the recognition of revenue and liabilities
- Applying AASB 15 often involves significant judgement, and entities should seek expert advice for complex or unique circumstances
Many inventory-based businesses offer customers a number of incentives to enhance customer loyalty. This article considers two common arrangements, being volume rebates and customer loyalty programs, and the accounting for such arrangements in accordance with AASB 15 Revenue from Contracts with Customers (AASB 15).
Volume rebates
Entities often enter into contracts with customers offering the customer a rebate (discount) if they purchase a specified volume of stock during a specified period. Volume rebates that apply retrospectively once specific quantity thresholds have been met represent variable consideration because the total amount of revenue recognised can change based on the actual volume purchased by the customer.
Accounting Guidance
Where variable consideration is involved in a contract, the entity estimates the volumes to be purchased and the resulting rebate in order to determine the transaction price and updates that estimate throughout the term of the contract. This estimation is performed using either the “expected value” method or “most likely amount” method, depending on which method the entity expects to better predict the amount of consideration to which it will be entitled. The expected value method is commonly used when an entity has a large population of similar transactions.
However, an entity shall include in the transaction price some or all of an amount of variable consideration estimated 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. This constraint to the recognition of revenue is an area of significant judgement requiring entities to exercise caution before they recognise revenue.
Practical example
How should CameraCo measure the revenue at 30 June? The amount of consideration CameraCo is expected to receive is variable or contingent on future events. Thus, CameraCo must estimate and recognise revenue, but only to the extent that it is highly probable that a significant reversal will not occur. In this case, CameraCo will recognise revenue of $31,500 (350 units x $90/unit) based on the most likely amount, and will recognise a provision payable to the customer for the volume rebate of $3,500 (350 units x $10/unit). If the fact pattern above were changed such that at 30 June CameraCo did not expect its annual sales to the customer to surpass 1000 units, it would recognise revenue based on the most likely amount of $100/unit (as opposed to $90/unit in the example above). However, if subsequent to 30 June, the customer acquired a company and sales subsequently surpassed the threshold and reached 1300 by 31 December, CameraCo would recognise revenue of $82,000 [1300 units x $90/unit – 350 units x $100/unit] in the 6 months to 31 December. [Based on Example 24 in International Financial Reporting Standard IFRS 15 Revenue from Contracts with Customers May 2014 Illustrative Examples (IFRS 15 Illustrative Examples)] |
Other considerations
If the discounted price only applies to future purchases once a minimum volume threshold has been met, this could convey a material right to a customer (which is to be accounted for as a separate performance obligation). The concept of a material right is considered further with respect to Loyalty programs below.
Loyalty programs
Loyalty programs often allow customers to accumulate rewards points which can be redeemed against future purchases. These programs should be analysed to determine whether they provide a customer with a material right, and therefore require accounting for as a separate performance obligation.
Accounting Guidance
If a contract grants a customer the option to buy additional goods or services, that option gives rise to a performance obligation only if it provides a material right to the customer that the customer would not receive without entering into that contract (for example, an extra discount beyond typical market discounts). When such a right exists, the customer effectively prepays for future goods or services, and revenue is recognised when those future goods or services are delivered or the option expires.
If a material right exists, the transaction price in the contract should be allocated between the goods sold and the material right obtained (for example, the value of the future goods to be claimed by the customer using their points). This allocation should be done on a relative stand-alone selling price basis.
Practical example
How should SportsCo account for the customer loyalty program? The points provide a material right to customers that they would not receive without entering into a contract. Consequently, SportsCo concludes that the promise to provide points to the customer is a performance obligation. SportsCo allocates the transaction price ($100,000) to the product and the points on a relative stand-alone selling price basis as follows:
At the end of the first reporting period, 4,500 points have been redeemed, and SportsCo continues to expect 9,500 points to be redeemed in total. SportsCo recognises revenue for the loyalty points of $4,110 [(4,500 points / 9,500 points) x 8,676] and recognises a contract liability of $4,566 ($8,676 – $4,110) for the unredeemed points at the end of the first reporting period. At the end of the second reporting period, 8,500 points have been redeemed cumulatively. SportsCo updates its estimate of the points that will be redeemed and now expects that 9,700 points will be redeemed. SportsCo recognises revenue for loyalty points of $3,493 [(8,500 total points redeemed / 9,700 total points expected to be redeemed) x $8,676 initial allocation – $4,110 recognised in the first reporting period]. The contract liability balance is $1,073 ($8,676 initial allocation – $7,603 of cumulative revenue recognised). [Based on Example 52 in IFRS 15 Illustrative Examples] |
Summing up
Customer incentives, including volume rebates and loyalty programs are common areas to consider for inventory-based businesses. While the guidance above is provided for in AASB 15, specific facts and circumstances can arise which may require significant judgement. Please reach out to us, or your local Pitcher Partners contact to discuss further if required.
