Retail and consumer products entities need to defer revenue for a loyalty or

Retail and consumer products entities need to defer

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performance obligation for purposes of revenue recognition. Retail and consumer products entities need to defer revenue for a loyalty or reward program that provides a material right until the future good or service is provided (i.e., when the loyalty points are redeemed and the performance obligation is satisfied) or the option expires. Example 52 in the standard 6 illustrates that an entity should routinely refine and evaluate its estimate of how many points it expects to be redeemed at each reporting period. How we see it Retail and consumer products entities that applied the incremental cost method to account for customer loyalty or reward programs under legacy GAAP have had to change how they account for these programs. Under the incremental cost method, entities recognize revenue at the time of the initial sale and accrue the estimated costs of customer award credits from the loyalty or reward program. Under ASC 606, entities defer a portion of the revenue using the relative standalone selling price method. Entities that historically applied the incremental cost method to account for customer loyalty or reward programs have had to change how they account for these programs.
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EY AccountingLink | ey.com/us/accountinglink 4 | Technical Line How the new revenue standard affects retail and consumer products entities Volume discounts Consumer products entities may provide incentives to their customers through volume discounts. These discounts can take different forms, such as tiered pricing (e.g., discounted pricing on future purchases over a certain volume level) or a discount that applies to all purchases under the agreement (e.g., discounted pricing on a retrospective basis once a certain volume level is met). We believe a volume rebate or discount that is applied retrospectively should be accounted for as variable consideration. This is because the final price of each good or service sold depends on the customer’s total purchases subject to the rebate program. That is, the consideration is contingent upon the occurrence or nonoccurrence of future events. This view is consistent with Example 24 in the standard. 7 Generally, if a volume rebate or discount is applied prospectively, we believe the rebate or discount would be accounted for as a customer option (not variable consideration). This is because the consideration for the goods or services in the present contract is not contingent upon or affected by any future purchases. Rather, the discounts available from the rebate program affect the price of future purchases. Entities need to evaluate whether the volume rebate or discount provides the customer with an option to purchase goods or services in the future at a discount that represents a material right (and is therefore accounted for as a performance obligation).
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  • Fall '17
  • meenakshi

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