Whilst consumers are inundated with a myriad of Black Friday offers, and companies hope to boost sales in what has been a truly difficult year for all, accountants wonder how to record revenue correctly in line with existing accounting standards. This article will touch upon the correct accounting treatment for various situations, based on IFRS 15 principles.
Principles of revenue recognition under IFRS 15
IFRS 15 requires the use of a 5-step process to recognise revenue correctly, that is, at the correct amount and time:
- Identifying contracts with customers (which can be in writing, oral, or by business practice).
- Identifying the performance obligations (that is, the number of promises made by the entity to the customer).
- Determining the transaction price (that is, the fixed or variable consideration that the customer will pay to the entity)
- Allocating the transaction price to the performance obligations.
- Recognising revenue (based on whether the promise is being fulfilled by the entity at a point in time, or over time).
IFRS 15 can get very complicated to implement, but the following is the correct treatment of a number of common Black Friday offers.
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#1 Discounted Goods and Services transferred on the same day
Suppose an entity sells one type of item, which it normally sells for €70. On Black Friday, it offers customers the possibility to buy it for €30.
In this case, the only difference is that the transaction price will amount to €30, instead of €70. Revenue is recognised at the amount of €30, and at the point in time in which control is transferred – which is on Black Friday. There are no timing issues in this case.
The same applies if this were a service performed on Black Friday. Under IFRS, the revenue will be recognised at the discounted price, on Black Friday.
In the above cases, the cost doesn’t vary, so the profit will presumably be lower.
#2 Discounted Goods and Services transferred at a later date
What if the offer were for goods to be delivered in January 2021, subject to an order and payment on Black Friday for €30 rather than the normal price of €70? In this case, the contract with the customer is entered into on Black Friday, and the transaction price is still €30. Nonetheless, the revenue from the sale will be recognised at the point in time when control is transferred to the customer, that is, in January.
The same reasoning can also be applied to services. A customer might book a 2021 flight on Black Friday, for a discounted price of €30 rather than €70. In this case, the revenue is deferred to 2021 in spite of the payment received during November 2020.
A further complication with services is when these occur over multiple periods. Suppose a €700 training course is booked by a customer on Black Friday for a discounted price of €300. If this booking is valid for a training course that will take place between September 2021 and June 2022, revenue will need to be apportioned over that period of time. The entity will need to find a suitable method to measure the progress of the performance obligation that it is fulfilling. This could be for instance, based on the number of hours of lecturing. If the hours of lecturing are the same in each of the ten months, it means that four-tenths of the transaction price will be recognised in 2021, and the remaining six-tenths will be recognised in 2022. The result, in line with IFRS, would be the recognition of €0 revenue in 2020 (when the payment was made), €120 in 2021, and €180 in 2022.
#3 Purchase of goods and services resulting in vouchers or loyalty points
A further complication occurs if the purchase of goods and services on Black Friday results in special vouchers (to be redeemed in goods and services provided by the entity at a future date) or a higher number of loyalty points transferred to the customer when compared to other days of the year.
The added complication derives from the fact that not all vouchers or loyalty points will be redeemed by customers, but only some of them. IFRS 15 addresses this type of complexity as ‘customer breakage’.
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