Discounts and rebates can be offered to purchasers in a number of ways, for example trade discounts, settlement discounts, volume-based rebates and other rebates. Accounting for these reductions will vary depending on the type of arrangement. This IFRS Viewpoint provides our views on the purchaser’s accounting treatment for the different types of rebate and discount along with some application examples.
In our view, volume-based discounts should be recognised when it is probable they will be received. When the ‘cost’ for IAS 2 purposes is subject to uncertainties, the most likely cost is used. Therefore rebates that are probable should be deducted from the cost of the inventory and recognised as a prepayment or similar asset. The probability of obtaining the rebate should be reviewed at future period ends if the arrangement remains open. If receipt is no longer probable, then the prepayment asset should be
reversed with a corresponding adjustment to inventories and/or cost of sales as
appropriate.
If receipt of the rebate is not probable, or the amount cannot be measured reliably, then the inventory should be recorded at its gross amount. Again, this assessment should be
reviewed regularly. If the conclusion changes, then the rebate should be recorded at this stage (refer to example). If at this point some of the related inventory has been sold, then the proportion of the discount relating to those items should be reflected in cost
of sales.
The discount recorded should be based on the number of units purchased and should result in a reduction to the cost of those units.
It is common in some industries for purchasers to enter into arrangements that involve receiving payments from their suppliers (‘supplier payment arrangements’). These arrangements vary widely and can be complex. Some of these arrangements relate to inventory purchases but others do not. This IFRS Viewpoint is not intended to provide comprehensive guidance on accounting for supplier payment arrangements but some of the factors to consider are discussed briefly below.
Supplier payment arrangements require careful analysis to determine whether they relate to inventory purchases or to something else. In making this analysis it should be noted that the legal description of the arrangement may not always reflect its substance.
If these arrangements do not relate to inventory purchases, further analysis is required to determine the timing, amounts and presentation of any income arising. In a November 2004 agenda decision, the IFRIC concluded that rebates that “specifically and genuinely refund selling expenses” should not be deducted from the cost of inventories. This IFRIC agenda pre-dates the publication of IFRS 15, and this Standard should be considered in the analysis once it becomes effective.
If a supplier payment arrangement involves the purchaser providing goods or services to its supplier that are ‘distinct’ from the inventory purchases, the arrangement could result in revenue being recognised in accordance with IFRS 15. IFRS 15 applies to goods or services that are an output of the entity’s ordinary activities. IFRS 15 then provides the applicable guidance on when to recognise the related revenue. If the purchaser is not providing distinct goods or services the arrangement is likely to relate to inventory purchases, in which case the guidance in this IFRS Viewpoint applies.
In some situations, however, the purchaser might consider that amounts received do not relate to inventory purchases but are incidental to its main revenue-generating activities. In such cases it might be appropriate to present the related income in a line item other than revenue. For example, if the amounts received are to reimburse specific costs incurred, it may be appropriate to offset the income against those costs in the statement of comprehensive income (see paragraph 34 of IAS 1). In such circumstances judgement will be required to determine the most appropriate presentation.
