IAS 2 Example Contractual Volume Rebates – FAQ | IFRS

IAS 2 Example Contractual volume rebates

IAS 2 Example Contractual volume rebates provides an example calculation with regard to the costs of inventory in combination with contractual volume rebates.

The Case

On 1 January 20X1 Entity A, a retailer, enters into a 2-year contract with a supplier of product X. Under the agreement, Entity A purchases product X for $100 per item. The agreement provides that Entity A will receive a $5 rebate for each purchased item (applied retrospectively to all purchases) if it purchases at least 10,000 products over the 2-year contract term. On 1 January 20X1, Entity A purchased 6,000 products. Sales to customers were 5,500 (Q1 1,150, Q2 1,250, Q3 1,450, Q4 1,650), the sales price was increased every quarter with $2/product, starting at $120/product for Q1. At 31 December 20X1 Entity A assess that it is probable that it will earn the rebate as the sale of product X accelerated during the second half of the 20X1. The total estimated sales quantity for the two year period is 11,250. The rebate is contractual, therefore Entity A accrues it in its financial statements for the year 20X1.

1 January 20X1 IAS 2 Example Contractual volume rebates

Purchase of 6,000 products

DT

CT

BS – Inventory

$600,000

BS – Trade accounts payable

$600,000

Q 1 20X1

Sales of 1,150 items of product X at $120/product

Revenue recognition at a point in time

DT

CT

BS – Trade accounts receivable

$138,000

PL – Revenue

$138,000

PL – Cost of sales 1,150 * $100

$115,000

BS – Inventory

$115,000

Based on the realised sales and forecasts for the rest of the year it is not considered probable that the discount volume of 10,000 pieces for the two years will be reached. IAS 2 Example Contractual volume rebates

Q 2 20X1

Sales of 1,250 items of product X at $122/product

DT

CT

BS – Trade accounts receivable

$152,500

PL – Revenue

$152,500

PL – Cost of sales 1,250 * $100

$125,000

BS – Inventory

$125,000

Based on the realised sales (Q1 plus Q2 one-on-one extrapolated is 9,600 pieces for the two years, with Q2 almost 9% higher then Q1) and forecasts for the rest of the year it is estimated 80% probable that the discount volume of 10,000 pieces for the two years will be reached.

Estimated discount calculation/recording

Sold 1,150 (Q1) plus 1,250 (Q2) = 2,400, total purchase 6,000 => 3,600 in stock. Discount $5 * 80% = $4: IAS 2 Example Contractual volume rebates IAS 2 Example Contractual volume rebates IAS 2 Example Contractual volume rebates

Discount entry

DT

CT

Discount receivable 6,000 * $4

$24,000

Inventory 3,600 * $4

$14,400

Cost of sales 2,400 * $4

$9,600

Q 3 20X1

Sales of 1,450 items of product X at $124/product

DT

CT

BS – Trade accounts receivable

$179,800

PL – Revenue

$179,800

PL – Cost of sales 1,450 * ($100 -/- $4)

$139,200

BS – Inventory

$139,200

Based on the realised sales (Q1 – Q3 one-on-one extrapolated is 10,267 pieces for the two years, with Q3 16% higher than Q2) and forecasts for the rest of the year it is estimated 100% probable that the discount volume of 10,000 pieces for the two years will be reached.

Estimated discount calculation/recording

Sold 1,150 (Q1), 1,250 (Q2) plus 1,450 (Q3) = 3,850, total purchase 6,000 => 2,150 in stock. Discount $5 already recorded is a discount of $4, adjustment $1: IAS 2 Example Contractual volume rebates IAS 2 Example Contractual volume rebates

Discount entry

DT

CT

Discount receivable 6,000 * $1

$6,000

Inventory 2,150 * $1

$2,150

Cost of sales 3,850 * $1

$3,850

Q 4 20X1

Sales of 1,650 items of product X at $126/product

DT

CT

BS – Trade accounts receivable

$207,900

PL – Revenue

$207,900

PL – Cost of sales 1,650 * ($100 -/- $5)

$156,750

BS – Inventory

$156,750

1 January 20X2 

Purchase of 5,500 products

DT

CT

BS – Inventory 5,500 * $95 (full discounted)

$522,500

BS – Trade accounts payable

$522,500

Q 1 20X2

Sales of 1,350 items of product X at $124/product

DT

CT

BS – Trade accounts receivable

$167,400

PL – Revenue

$167,400

PL – Cost of sales 1,350 * $95

$128,250

BS – Inventory

$128,250

Q 2 20X2

Sales of 1,250 items of product X at $124/product

DT

CT

BS – Trade accounts receivable

$155,000

PL – Revenue

$155,000

PL – Cost of sales 1,250 * $95

$118,750

BS – Inventory

$118,750

No changes in cost ($95/product), some concerns regarding impairments because of lower sales and lower sales prices!

Q 3 20X2 

Sales of 950 items of product X at $122/product

DT

CT

BS – Trade accounts receivable

$115,900

PL – Revenue

$115,900

PL – Cost of sales 950 * $95

$90,250

BS – Inventory

$90,250

Based on the sales development (lowering quantities and lower sales) the entity decides to record a $1.5/product impairment (based on a market price of $95 less cost to sell of $1.5), items in stock are 2,450 (see tables below).

Impairment of inventory

DT

CT

Cost of sales impairment of inventory to net realisable value 2,450 * $1.5

$3,675

Inventory

$3,675

Q 4 20X2 IAS 2 Example Contractual volume rebates

Sales of 1,250 items of product X at $120/product

DT

CT

BS – Trade accounts receivable

$150,000

PL – Revenue

$150,000

PL – Cost of sales 1,250 * $93.5

$116,875

BS – Inventory

$116,875

Financial close 31/12/20×2 IAS 2 Example Contractual volume rebates

In December 20×2 the sales department has decided to discontinue the sale of product X. In the financial close of 31/12/20×2 the entity decide to record an additional impairment of $0.5/product (based on a market price of $95 less cost to sell of $2.0), items in stock are 1,200 (see tables below).

Impairment of inventory

DT

CT

Cost of sales impairment of inventory to net realisable value 1,200 * $0.5

$600

Inventory

$600

Closing inventory 1,200 pieces at cost ($95.0) less impairment ($2.0) is $ 111,600. IAS 2 Example Contractual volume rebates

Transaction summary table:

IAS 2 Example Contractual volume rebates

See also: The IFRS Foundation

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