Illustrative Example of a Vendor Allowances Arrangement Presented below is a hyp
ID: 2751504 • Letter: I
Question
Illustrative Example of a Vendor Allowances Arrangement Presented below is a hypothetical example that illustrates a vendor allowances arrangement. Constent wth aid Cohig and sell chc Tesco routinely negotiates contracts with its vendors for purchasing products at best prices, and passes on the savings to its customers. One such annual contract with CPC, a leading consumer products company was initiated on September 1t 2013. The contract stipulated that Tesco will continue to receive 8 percent refund of the purchase price if it bought at least the same quantity (3.5 billion units) of CPC products as it did in the previous contract period, regularly priced at £2 per unit (total purchases of £7 billion). In addition, depending on the level of purchases during the contract period, the contract stipulated a lower (or higher) refund, as followsExplanation / Answer
Whether CPC Recognition of Sales Allowances as Selling, General and Administrative(SGA Expenses) is Correct as per IFRS?
As per IFRS, Find the following Pronuncements:
“The incremental costs of obtaining a contract must be recognised as an asset if the entity expects to recover those costs. However, those incremental costs are limited to the costs that the entity would not have incurred if the contract had not been successfully obtained (e.g. ‘success fees’ paid to agents). A practical expedient is available, allowing the incremental costs of obtaining a contract to be expensed if the associated amortisation period would be 12 months or less. [IFRS 15:91-94]”
Thus, What CPC has done by Immediately Recognising the Cash Outflow as an Expense is Wrong, The Amount had to first be treated as an asset and had to be amortised, as and when Sales were made for 3.5 billion Units, The Cash Settlement Made at the end of the year would have been shown as a Reduction to Revenue, as per below Pronuncement in IFRS:
Where a contract contains elements of variable consideration, the entity will estimate the amount of variable consideration to which it will be entitled under the contract. [IFRS 15:50] Variable consideration can arise, for example, as a result of discounts, rebates, refunds, credits, price concessions, incentives, performance bonuses, penalties or other similar items. Variable consideration is also present if an entity’s right to consideration is contingent on the occurrence of a future event. [IFRS 15:51]
The standard deals with the uncertainty relating to variable consideration by limiting the amount of variable consideration that can be recognised. Specifically, variable consideration is only included in the transaction , and to the extent that, it is highly probable that its inclusion will not result in a significant revenue reversal in the future when the uncertainty has been subsequently resolved. [IFRS 15:56]
Whether CPC Recognition of Sales Allowances as Selling, General and Administrative(SGA Expenses) is Correct as per US GAAP?
Please find Below, List of Disclosures in US GAAP:
US GAAP Disclosure List 2012
Content | Statement of Income (Including Gross Margin)
Sales Revenue, Goods, Net
Item
Type
Period
Balance
Description
Sales Revenue, Goods, Gross
$
duration
credit
Aggregate revenue during the period from sale of goods in the normal course of business, before deducting returns, allowances and discounts.
Sales Discounts, Returns and Allowances, Goods
$
duration
debit
Sales Returns and Allowances, Goods
$
duration
debit
Sales Returns, Goods
$
duration
debit
The aggregate refunds recognized during an accounting period due to goods returned by customers (other than under warranty provisions). Returns are a deduction from gross revenue in arriving at net revenue.
Sales Allowances, Goods
$
duration
debit
The aggregate selling price reductions recognized during an accounting period including, but not limited to, the sale of defective or nonconforming goods, a strategy to increase sales (generally over the short-term), move slow-moving items, develop distribution channels, or reward valuable customers. Allowances are a deduction from gross revenue in arriving at net revenue.
Sales Allowances, Price Protection
$
duration
debit
Amount of reduction to gross sales revenue attributable to price protection agreements with customers or clients which limit the sales price of goods or services.
Sales Returns and Allowances, Goods, Total
$
duration
debit
Total deduction from sales during the period arising from goods returned by customers (other than under warranty provisions) and price reductions (allowance, price protection agreements) given by the entity. Returns and allowances are a deduction from gross revenue in arriving at net revenue.
Sales Discounts, Goods
$
duration
debit
Aggregate cash discounts given by the entity for goods sold to customers including, but not limited to, early payments of accounts due. For example, selling terms of "2/10, net 30" entitle a customer to a 2% discount for prompt payment within 10 days, otherwise full payment is expected in 30 days. Discounts are a deduction from gross revenue in arriving at net revenue.
Sales Discounts, Returns and Allowances, Goods, Total
$
duration
debit
Aggregate of: (i) sales discounts given by the entity, including, but not limited to, early payments of accounts due, (ii) the total deduction from sales during the period arising from goods returned by customers (other than under warranty provisions), and (iii) price reductions (allowance, price protection agreements) given by the entity. Discounts, returns and allowances are a deduction from gross revenue in arriving at net revenue.
Sales Revenue, Goods, Net, Total
$
duration
credit
Aggregate revenue during the period from the sale of goods in the normal course of business, after deducting returns, allowances and discounts.
As per the Disclosures the Payments made to Tesco, Will be A Sales allowance, which is Defined in Point 5 as “The aggregate selling price reductions recognized during an accounting period including, but not limited to, the sale of defective or nonconforming goods, a strategy to increase sales (generally over the short-term), move slow-moving items, develop distribution channels, or reward valuable customers. Allowances are a deduction from gross revenue in arriving at net revenue.”
Thus it has to be shown as a Reduction from Sales Revenue and not as an Expense.
Practice of CPC is Wrong under GAAP.
Item
Type
Period
Balance
Description
Sales Revenue, Goods, Gross
$
duration
credit
Aggregate revenue during the period from sale of goods in the normal course of business, before deducting returns, allowances and discounts.
Sales Discounts, Returns and Allowances, Goods
$
duration
debit
Sales Returns and Allowances, Goods
$
duration
debit
Sales Returns, Goods
$
duration
debit
The aggregate refunds recognized during an accounting period due to goods returned by customers (other than under warranty provisions). Returns are a deduction from gross revenue in arriving at net revenue.
Sales Allowances, Goods
$
duration
debit
The aggregate selling price reductions recognized during an accounting period including, but not limited to, the sale of defective or nonconforming goods, a strategy to increase sales (generally over the short-term), move slow-moving items, develop distribution channels, or reward valuable customers. Allowances are a deduction from gross revenue in arriving at net revenue.
Sales Allowances, Price Protection
$
duration
debit
Amount of reduction to gross sales revenue attributable to price protection agreements with customers or clients which limit the sales price of goods or services.
Sales Returns and Allowances, Goods, Total
$
duration
debit
Total deduction from sales during the period arising from goods returned by customers (other than under warranty provisions) and price reductions (allowance, price protection agreements) given by the entity. Returns and allowances are a deduction from gross revenue in arriving at net revenue.
Sales Discounts, Goods
$
duration
debit
Aggregate cash discounts given by the entity for goods sold to customers including, but not limited to, early payments of accounts due. For example, selling terms of "2/10, net 30" entitle a customer to a 2% discount for prompt payment within 10 days, otherwise full payment is expected in 30 days. Discounts are a deduction from gross revenue in arriving at net revenue.
Sales Discounts, Returns and Allowances, Goods, Total
$
duration
debit
Aggregate of: (i) sales discounts given by the entity, including, but not limited to, early payments of accounts due, (ii) the total deduction from sales during the period arising from goods returned by customers (other than under warranty provisions), and (iii) price reductions (allowance, price protection agreements) given by the entity. Discounts, returns and allowances are a deduction from gross revenue in arriving at net revenue.
Sales Revenue, Goods, Net, Total
$
duration
credit
Aggregate revenue during the period from the sale of goods in the normal course of business, after deducting returns, allowances and discounts.