Variable consideration can be presented in forms of discount, rebate, refund, credit, price concession, incentives, performance bonus, penalties or other similar items.

In this article, some of them will be addressed to give you more insights.

1. Options given to customer for additional goods and services

[IFRS 15.B40] said that the option to acquire additional goods or services give rise to a separate PO only if the option provides a material right to customer that it would not receive without entering into that contract. For example, a discount that is incremental to the range of discount typically given for those goods/services to that class of customer in that geographical area or market.

When the option provides a material right to customer, the customer in effect pays in advance for future goods/services. Therefore the entity shall recognize revenue allocated this PO only when future goods/services are transferred or the option expired.

If the customer has option to purchase additional goods/services at a price that reflect stand-alone selling price of those goods/services, the option is not a material right and should not be accounted for as a separate PO in addition to the original PO in the same contract.

Illustrative example

a. Coupon at substantial discount after the sale

Background:

- A retailer sells vacuum cleaner to customers at USD 100,000

- The seller provides a coupon for 60% discount off on future purchases within next 03 months

- The seller normally grants 15% discount for same products and same period.

- The seller estimates that 80% of the customers will exercise the option for purchase of USD 30,000 of discounted additional products.

Answer:

- The seller will account for the additional purchases as a separate PO.

- It is material right because it is incremental to the normal discount

- The stand-alone price for the option is USD 30,000 x (60% - 15%) x 80% = USD 10,800

- Transaction price allocated for the option will be deferred and recognized as revenue upon exercise or expiry of the option.

Entry: Dr. Bank USD 100,000

Cr. Contract liability (USD 10,800)

Cr. Revenue (USD 89,200)

b. Free product rebate after sale

Background:

- A retailer sells skin care products to customer at USD 2,000/set.

- If customer buy 3 sets at a time and fill in an online application form within 01 week after the purchase, she would become VIP and will receive a welcome gift that worth of USD 200 sale value for the successful registration.

- The retailer estimates, based on past experience, that 80% of the customer will complete online application and receive the free gift.

Answer:

Option for free products gives the customer material rights which otherwise would not available to normal customer. Therefore, it should be accounted as a separate PO and corresponding revenue is recognized only when free gift was given to customer (when PO is satisfied).

Value of the option is estimated as following:

2. Consideration payables to a customer

[IFRS 15.70] said that an entity shall accounts for consideration payable to customer as a reduction of transaction price (revenue) unless the payment to the customer is in exchange for a distinct good or service (which is accounted for as a normal purchase instead).

Consideration payables to customer can be in forms of cash, credit or other similar terms which benefits customer.

In case amount of consideration given to customer is higher than fair value of distinct good or service the entity received from customer, the excessive amount is recorded as a reduction of transaction price too.

Example:

Background:

- Manufacture sells 1,000 boxes of chocolate to supermarket chain at USD 10 each.

- Supermarket sells at USD 15 to customer.

- Manufacture issued coupon program on newspaper stating that customer can enjoy USD 2 reduction in sale price if presenting coupon within 03 months from issuance date.

- Manufacturer will reimburse USD 2 of reduction to supermarket for each redeemed coupon.

- Manufacturer estimate that 400 coupons would be redeemed.

Answer:

3. Refund liabilities

According to [IFRS 15.55], a potential refund is excluded from revenue and to be recorded as a liability at the time of sale.

When there is variable consideration, revenue is recognized only to extent that it is probable that a significant reversal in the amount of cumulative revenue will not occur when the uncertainty associated with variable consideration is subsequently resolved. [IFRS 15.56].

Refund liability should be updated at end of each reporting period to update for change in circumstance.

Example:

Background:

- A retailer sells a tablet to customer A for USD 100 on January 1 and agrees to reimburse the customer for any difference between the purchase price and any lower price offered by a direct competitor during 03-month period after the sale date.

- On a probability-weighted basis, the retail estimates it will reimburse USD 5 to customer.

Answer:

- Refund obligation should be recorded as liability on sale date.

- Revenue is only recorded to extent of USD 95 which is highly probable that revenue reversal will not occur (calculated on probability-weighted basis).

Entry: Dr. Cash USD 100

Cr. Refund liability (USD 5)

Cr. Revenue (USD 95)

4. Volume discount

When there is variable consideration, an entity shall recognize revenue only to the extent that significant reversal in the amount of cumulative revenue would not occur when uncertainty associates with the variable consideration is subsequently resolved . [IFRS 15.56].

Example:

Background:

- An FMCG company sold Shampoo to a customer at USD 10/unit.

- If the customer buys 1000 units in a calendar year, the price is retrospectively reduced to USD 9/unit. The consideration is then variable.

- In the 1st quarter, the customer bought 75 units only. The entity estimated customer’s sale cannot exceed 1000 units in the year.

- In the 2nd quarter, the customer was merged with another company and become bigger. It acquired 500 units in 2nd quarter. The entity now estimates that customer’s sale could exceed 1000 units in this year.

Answer:

- In 1st quarter:

Dr. Cash/ Receivables USD 750

Cr. Revenue (USD 750)

- In 2nd quarter:

Dr. Cash/ Receivables USD 5,000

Cr. Sale (USD 4,425)

Cr. Unearned revenue (USD 575)

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Reassessment of variable consideration

[IFRS 15.59] said that at the end of each reporting period, an entity shall updates the estimated transaction price (including updating its assessment of whether an estimate of variable is constrained) to present faithfully the circumstance present at the end of reporting period and accounts for change in transaction price.

Reference

- IFRS 15 Revenue from contracts with customers

- Illustrative examples extracted from IFRS training documents prepared by ACCA Vietnam (2017)