consideration (see 6.2 above). [IFRS 15.70].
If consideration payable to a customer is a payment for a distinct good or service from
the customer, an entity is required to account for the purchase of the good or service in
the same way that it accounts for other purchases from suppliers. If the amount of
consideration payable to the customer exceeds the fair value of the distinct good or
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service that the entity receives from the customer, the entity is required to account for
the excess as a reduction of the transaction price. If the entity cannot reasonably
estimate the fair value of the good or service received from the customer, it is required
to account for all of the consideration payable to the customer as a reduction of the
transaction price. [IFRS 15.71].
If consideration payable to a customer is accounted for as a reduction of the transaction
price, it is recognised as a reduction of revenue when (or as) the later of when:
(a) the entity recognises revenue for the transfer of the related goods or services to
the customer; and
(b) the entity pays or promises to pay the consideration (even if the payment is
conditional on a future event), which might be implied by the entity’s customary
business practices. [IFRS 15.72].
Figure 28.12 illustrates these requirements:
Figure 28.12:
Consideration payable to a customer
Is the consideration payable to
No
the customer in exchange for a
distinct good or service?
Account for the consideration payable to the
Yes
customer as a reduction of the transaction price
when (or as) the later of the following occurs:
Can the fair value of the distinct No
• The entity recognises revenue for the
good or service be reasonably
transfer of the related goods or services
estimated?
to deliver to the customer.
• The entity pays (or promises to pay)
Yes
the consideration.
For consideration paid up to the fair value, account
Does the amount of
for the consideration payable to the customer the
consideration payable to the
Yes
same way that the entity accounts for other
customer exceed the fair value of
purchases from suppliers.
the distinct good or service?
The excess would be accounted for as a reduction in
the transaction price.
No
Account for the consideration
payable to the customer in the
same way that the entity
accounts for other purchases
from suppliers
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. This would include entities
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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.
6.7.1
Determining who is an entity’s customer when applying the
requirements for consideration payable to a customer
When applying the requirements for consideration payable to a customer, it is important
to determine who is an entity’s customer. This was considered by the TRG members at
both the March 2015 and July 2015 TRG meetings.
The TRG members generally agreed that the requirements for consideration payable
to a customer apply to all payments made to entities/customers in the distribution
chain for that contract. However, they agreed that there could also be situations in
which the requirements would apply to payments made to any customer of an entity’s
customer outside the distribution chain if both parties are considered the entity’s
customers. For example, in an arrangement with a principal, an agent and an end-
customer, an agent may conclude its only customer is the principal or it may conclude
that it has two customers – the principal and the end-customer. Regardless of this
assessment, an agent’s payment to a principal’s end-customer that was contractually
required based on an agreement between the entity (agent) and the principal would
represent consideration payable to a customer. Absent similar contract provisions
that clearly indicate when an amount is consideration payable, the TRG members
agreed that agents need to evaluate their facts and circumstances to determine
whether payments made to an end-customer would be considered a reduction of
revenue or a marketing expense.88
6.7.2
Classification of 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.
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 (as discussed at 5.2.1 above). 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.
6.7.3
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.
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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 are given below.
• 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.
• Co-operative advertising arrangements – In some arrangements, a vendor agrees
to reimburse a reseller for a portion of costs incurred by the reseller to advertise
the vendor’s products. The determination of whether the payment from the
ven
dor 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 – A vendor may agree to reimburse a retailer up to a specified
amount for shortfalls in the sales price received by the retailer for the vendor’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 (see 6.2.1.E above).
• Coupons and rebates – An indirect customer of a vendor 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 vendor. Generally, such fees do not provide a distinct
good or service to the manufacturer and are treated as a reduction of the
transaction price.
• ‘Pay-to-play’ arrangements – In some arrangements, a vendor 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.
• 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.
IFRS 15’s accounting for consideration payable to a customer is similar to practice under
legacy IFRS. However, the requirement to determine whether a good or service is
‘distinct’ in order to treat the consideration payable to a customer as anything other than
a reduction of revenue is new. While many of the illustrative examples to IAS 18 implied
that the vendor would have to receive an ‘identifiable benefit’ from the customer that
was sufficiently separable from the customer’s purchases of the vendor’s products, it
was not explicitly discussed in legacy IFRS. As such, some entities may need to reassess
their treatment of consideration paid or payable to a customer.
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6.7.3.A
Payments to a customer that are within the scope of the requirements
for consideration payable to a customer
At both the March 2015 and July 2015 TRG meetings, the TRG members discussed
which payments made to a customer would be within the scope of the requirements for
consideration payable to a customer.
The TRG members generally agreed that an entity may not need to separately analyse
each payment to a customer if it is apparent that the payment is for a distinct good or
service acquired in the normal course of business at a market price. However, if the
business purpose of a payment to a customer is unclear or the goods or services are
acquired in a manner that is inconsistent with market terms that other entities would
receive when purchasing the customer’s good or services, the payment needs to be
evaluated under these requirements.89 In the Basis for Conclusions, the IASB noted that
the amount of consideration received from a customer for goods or services and the
amount of any consideration paid to that customer for goods or services may be linked
even if they are separate events. [IFRS 15.BC257].
6.7.4
Timing of recognition of consideration paid or payable to a customer
If the consideration paid or payable to a customer is a discount or refund for goods or
services provided to a customer, this reduction of the transaction price (and, ultimately,
revenue) is recognised at the later of when the entity transfers the promised goods or
services to the customer, or the entity promises to pay the consideration. [IFRS 15.72]. For
example, if goods subject to a discount through a coupon are already delivered to the
retailers, the discount would be recognised when the coupons are issued. However, if a
coupon is issued that can be used on a new line of products that have not yet been sold
to retailers, the discount would be recognised upon sale of the products to a retailer.
Certain sales incentives, such as mail-in rebates and manufacturer coupons, entitle a
customer to receive a reduction in the price of goods or services by submitting a form
or claim for a refund of a specified amount of the price charged to the customer at the
point of sale. An entity must also recognise a liability for those sales incentives at the
later of: (a) when it recognises revenue on the goods or services; or (b) the date at which
the sales incentive was offered. The amount of liability will be based on the estimated
amount of discounts or refunds that will be claimed by customers, similar to how the
entity would estimate variable consideration (see 6.2.2 above).
Even if the sales incentives would result in a loss on the sale of the product or service,
an entity would also recognise a liability for those sales incentives at the later of:
(a) when it recognises revenue on the goods or services; or (b) the date at which the
sales incentive was offered. That is, an entity would not recognise the loss before either
date. However, an entity would also need to consider whether the offer indicates that
the net realisable value of inventories are lower than costs which will require write-
down of inventories to net realisable value. [IAS 2.9, IAS 2.28].
However, to determine the appropriate timing of recognition of consideration payable
to a customer, entities also need to consider the requirements for variable
consideration. That is, the standard’s description of variable consideration is broad and
includes amounts such as coupons or other forms of credits that can be applied to the
amounts owed to an entity by the customer (see 6.2.1 above). IFRS 15 requires that all
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potential variable consideration be considered and reflected in the transaction price at
contract inception and reassessed as the entity performs. In other words, if an entity has
a history of providing this type of consideration to its customers, the requirements on
estimating variable consideration would require that such amounts be considered at
contract inception, even if the entity has not yet provided or explicitly promised this
consideration to the customer.
The TRG discussed the potential inconsistency that arises between the requirements
on consideration payable to a customer and variable consideration, as the requirements
specific to consideration payable to a customer indicate that such amounts are not
recognised as a reduction of revenue until the later of when:
• the related sales are recognised, or
• the entity promises to provide such consideration.90
A literal read of these requirements seems to suggest that an entity need not anticipate
offering these types of programmes, even if it has a history of doing so, and would only
recognise the effect of these programmes at the later o
f when the entity transfers the
promised goods or services or makes a promise to pay the customer. The TRG members
generally agreed that if an entity has historically provided or intends to provide this type
of consideration to customers, the requirements on estimating variable consideration
would require the entity to consider such amounts at contract inception when the
transaction price is estimated, even if the entity has not yet provided or promised to
provide this consideration to the customer.91 If the consideration paid or payable to a
customer includes variable consideration in the form of a discount or refund for goods
or services provided, an entity would use either the expected value method or most
likely amount method to estimate the amount to which the entity expects to be entitled
and apply the constraint to the estimate (see 6.2.3 above for further discussion) to
determine the effect of the discount or refund on the transaction price.
The general agreement by TRG members that entities need to consider the requirements
for variable consideration to determine the appropriate timing of recognition of
consideration payable to a customer may result in a change in practice for some entities.
Significant judgement may be needed to determine the appropriate timing of recognition.
The standard includes the following example of consideration paid to a customer.
[IFRS 15.IE160-IE162].
Example 28.49: Consideration payable to a customer
An entity that manufactures consumer goods enters into a one-year contract to sell goods to a customer that
is a large global chain of retail stores. The customer commits to buy at least €15 million of products during
the year. The contract also requires the entity to make a non-refundable payment of €1.5 million to the
customer at the inception of the contract. The €1.5 million payment will compensate the customer for the
changes it needs to make to its shelving to accommodate the entity’s products.
The entity considers the requirements in paragraphs 70–72 of IFRS 15 and concludes that the payment to the
customer is not in exchange for a distinct good or service that transfers to the entity. This is because the entity
does not obtain control of any rights to the customer’s shelves. Consequently, the entity determines that, in
accordance with paragraph 70 of IFRS 15, the €1.5 million payment is a reduction of the transaction price.
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 424
