Dealing with Variable Consideration on Discount and Volume Rebate as per IFRS 15
Rebates are offered to consumers for sales that have agreed upon relationships like volume related to achievements.
Discounts and rebates are differentiated based on their timing. Although they are similar in terms of pricing perspective, they are different in terms of the period they are measured in. A discount is the reduction of price from a product while a rebate is specified as a receipt given by the supplier for completing certain conditions.
To explain the rebate process, let’s discuss an example.
Two Group is a licensed company. It consists of two pharmacy companies that are meant for wholesale purchasing and to benefit from the volume rebates that come from bulk buying. Although no contract has been signed between the individual businesses and Two Group, all goods are distributed in the companies by the group. Thus, the advantage of the rebate is divided into the Group corporations according to the number of sales from external customers.
Moving on to the deals between the supplier and Two Group, for purchases less than AED 2.5m, Two Group is sanctioned to 5% rebate and 10% for procurements crossing the limit of AED 2.5m. During 2019, the Group procured pharmaceutical resources with the value of AED 2.5m.
Under IFRS 15, in order to recognize income, these are the steps to be trailed:
- Identifying the contract with customers
- Identifying the obligation of performance in contract
- Determining the transaction rate
- Allocating transaction price
- Recognizing revenue when obligatory performance is satisfied
Hence, if the possibility of rebate with consumers remains in the upcoming times, then some reasonable estimates will need to be considered. The transaction rate will be the quantity of consideration that an organization is entitled to give as a trade-off for the transfer of services or goods to customers. Let’s suppose an organization sells products on credit for a hundred and offer a 10% discount if a client pays within 10 days. Or else, full payment has to be given after thirty days.
The answer relies on the circumstances and facts for each case.
The IFRS 15 states that if an agreement contains variable consideration through elements, then the institute should estimate its variable consideration which will be obligatory on them. Moreover, they say that the variable consideration is included only in the deal price and it is very likely that its presence will not end as a valuable revenue reversal.
Therefore, before concluding discounts as variable consideration, the retailer should examine the buyer’s likelihood of paying immediately.
Rebates and discounts are tools that can be useful in business transactions, if you know when and how to use them. When it comes to large transactions between companies, it can be a good idea to go in after doing some homework. Not only on the other party but on yourself as well. Before entering a negotiation, you should be able to gauge yourself and the other party. A great way to do this can be through an audit. You can carry out an internal audit in order to gauge your own company’s position and gain insight that can help you make better decisions. An internal audit firm can help you perform an audit and understand it better. You can also check the International Standards For The Professional Practice Of Internal Auditing to learn more about internal audits.