Consideration paid or payable to a customer

Many entities make payments to their customers. In some cases, the consideration paid or payable to a customer represents purchases by the entity of goods or services offered by the customer that satisfy a business need of the entity. In other cases, the consideration paid or payable represents incentives given by the entity to entice the customer to purchase, or continue purchasing, its goods or services. [ see text in IFRS 15 70 – 72]

The following decision tree illustrates these requirements: Consideration paid or payable to a customer

Consideration paid or payable to a customer


Consideration paid or payable to a customer


References:

Document your decisions in your financial close file to facilitate internal review and approval and external audits.

The standard indicates that an entity accounts for the consideration payable to a customer, regardless of whether the purchaser receiving the consideration is a direct or indirect customer of the entity. This includes consideration to any purchasers of the entity’s products at any point along the distribution chain. Consideration paid or payable to a customerConsideration paid or payable to a customer

This would include entities that make payments to the customers of resellers or distributors that purchase directly from the entity (e.g., manufacturers of breakfast cereals may offer coupons to end-consumers, even though their direct customers are the grocery stores that sell to end-consumers). The requirements in IFRS 15 apply to entities that derive revenue from sales of services, as well as entities that derive revenue from sales of goods.

Classification of the different types of consideration paid or payable to a customer

To determine the appropriate accounting treatment, an entity must first determine whether the consideration paid or payable to a customer is a payment for a distinct good or service, a reduction of the transaction price or a combination of both. Consideration paid or payable to a customer

For a payment by the entity to a customer to be treated as something other than a reduction of the transaction price, the good or service provided by the customer must be distinct. However, if the payment to the customer is in excess of the fair value of the distinct good or service received, the entity must account for such excess as a reduction of the transaction price. In the event that the entity cannot reasonably estimate the fair value of the good or service received from the customer, it will need to account for all of the consideration payable to the customer as a reduction in the transaction price. Consideration paid or payable to a customer

Forms of consideration paid or payable to a customer

Consideration paid or payable to customers commonly takes the form of discounts and coupons, among others. Furthermore, the promise to pay the consideration may be implied by the entity’s customary business practice. Consideration paid or payable to a customer

Consideration paid or payable to a customer can take many different forms. Therefore, entities have to carefully evaluate each transaction to determine the appropriate treatment of such amounts. Some common examples of consideration paid to a customer include:

  • Slotting fees — Manufacturers of consumer products commonly pay retailers fees to have their goods displayed prominently on store shelves. Generally, such fees do not provide a distinct good or service to the manufacturer and are treated as a reduction of the transaction price. Consideration paid or payable to a customer
  • Co-operative advertising arrangements — In some arrangements, an entity agrees to reimburse a reseller for a portion of costs incurred by the reseller to advertise the entity’s products. The determination of whether the payment from the vendor is in exchange for a distinct good or service at fair value depends on a careful analysis of the facts and circumstances of the contract.
  • Price protection – An entity may agree to reimburse a retailer up to a specified amount for shortfalls in the sales price received by the retailer for the entity’s products over a specified period of time. Normally such fees do not provide a distinct good or service to the manufacturer and are treated as a reduction of the transaction price. Consideration paid or payable to a customer
  • Coupons and rebates – An indirect customer of an entity may receive a refund of a portion of the purchase price of the product or service acquired by returning a form to the retailer or the entity. Generally, such fees do not provide a distinct good or service to the manufacturer and are treated as a reduction of the transaction price. Consideration paid or payable to a customer
  • Pay-to-play’ arrangements — In some arrangements, an entity pays an upfront fee to the customer in order to obtain a new contract. In most cases, these payments are not associated with any distinct good or service to be received from the customer and are treated as a reduction of the transaction price. Consideration paid or payable to a customer
  • Purchase of goods or services — Entities often enter into supplier-vendor arrangements with their customers in which the customers provide them with a distinct good or service. For example, a software entity may buy its office supplies from one of its software customers. In such situations, the entity has to carefully determine whether the payment made to the customer is solely for the goods or services received or whether part of the payment is actually a reduction of the transaction price for the goods or services the entity is transferring to the customer. Consideration paid or payable to a customer

See also: The IFRS Foundation

Consideration paid or payable to a customer

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