To apply IFRS 15, original equipment manufacturers (OEMs) will need to change the way they evaluate incentives. OEMs need to use significant judgement when they identify separate performance obligations (i.e., units of account), which may be different from those identified under IAS 18.
OEMs frequently offer sales incentives in contracts to sell vehicles to dealers. These sales incentives may be cash rebate bonuses or another type of incentive available to dealers and retail customers (who purchase the vehicle from the dealer). They may also include free, or heavily discounted, goods or services provided to retail customers, such as free satellite radio or free maintenance for a specified period. Dealer sales vehicle incentives
Under IFRS 15, cash incentives (i.e., cash, credits or other items that can be applied against amounts owed to the OEM) paid by the OEM to customers (dealers and retail customers) will generally be treated as a reduction of the transaction price and, therefore, of revenue. However, in some cases, the payment to the customer is in exchange for a distinct good or service that the customer transfers to the OEM. If the OEM is able to reasonably estimate the fair value of the distinct good or service transferred by the customer, the OEM accounts for that purchase in the same way it accounts for other purchases from suppliers. This is similar, but not identical, to current IFRS. As such, OEMs will need to evaluate whether the new standard changes the accounting treatment for its cash incentive programs. Dealer sales vehicle incentives
Under IFRS 15, incentives, whether directly from the OEM to retail customers or indirectly through dealers, providing free or discounted goods will likely represent promised goods or services (i.e., revenue elements), rather than marketing incentives. An example of such indirect incentives is free maintenance services performed by a dealer for which the OEM provides reimbursement. The Boards’ concluded that, even if such incentives are not explicit promises in a contract, they would, nonetheless, be an implied promise if the OEM has a customary business practice that results in the retail customer having a valid expectation that the OEM is obligated to provide the maintenance services. Therefore, such amounts are considered as promises in the contract and the OEM will be required to account for the free services as a revenue element. Dealer sales vehicle incentives
Treating a free good or service as a separate revenue element may be a change in practice for some OEMs. In addition, OEMs will have to review their processes for estimating rebates and other forms of variable consideration to make sure they fully address the new requirements for estimating the transaction price (and applying the constraint) and appropriately document their conclusions. Dealer sales vehicle incentives