IFRS 115/IND AS 115 - Revenue from Contracts with Customers - Customer Options for Additional Goods or Services (Relevant Extract)

Guess what? I went to buy a iPhone and gotta AirPods for free, Yeah,
Free Free Free!😃

This is something like a every day thing now!
Buy 2 get 1 free
1 year contract with 3 months free
Buy now and get 35% discount on your next purchase up-to 1,000
Receiving loyalty points with every purchase done with POSB/any card

We all agree to this long standing carrot and stick approach for taping the market!✌
But How does accounting for these transactions works?🤷‍♀️
Should company recognize all the amount received as revenue at the point of sale?
How about the goods/service offered for free?
Shouldn’t these be accounted for? or should it be?
Answer to all these questions lies under
IFRS 115/IND AS 115 Revenue from Contracts with Customers -
Customer Options for Additional Goods or Services

1. How to Identify if the additional goods/services comes under IFRS 115/IND AS 115?

2. What about the amounts at which this additional goods/service should be recognized?
Step 1 : Calculate stand-alone price of Goods/services sold
Step 2 : Calculate stand-alone price of Additional benefit/goods/service sold
Step 2.1 : While calculating stand-alone price of additional goods/service do consider :
-Likelihood that customer will opt for it
-Existing benefit without entering into contract
(for instance if customer gets 10% discount in any case and company is offering 25% discount on next purchase by entering into this contract, the incremental/additional benefit here is of only 15%). The idea is to figure out expected additional actual outflow of resources/goods/services here.
Step 3: Derive ratio of stand-alone price of each goods and services sold to the total amount of goods/service sold ((step 1/step 1 +step 2) *100)
Step 4: Apply this ratio to actual transaction price to calculate/allocate price at which goods are sold to each item of goods sold
Step 5: Recognize revenue related to goods sold as and when the performance obligation is satisfied (at point in time or over time)
Step 6: Create liability for additional good (free one) and recognize this one as and when Performance obligations is satisfied (for example if it is discount coupon then you need to recognize this revenue when coupon is being used)
Step 7: On expiry of the coupon reverse all liability and recognize in revenue

Basically in all this 7 steps we are trying to find out the price of the additional goods/service sold?
Why?
Because seller is selling the other item as additional benefit as a part of main contract without any cost. Hence the price as per seller is only related to main item of goods/service sold. However for accounting purpose we need to find out and allocate/split the transaction price(selling price) to both main goods and additional goods.
Why?
Because only then we can recognize revenue in a most appropriate manner as per the standard.

3. When should revenue be recognized?
-Earliest of -
a) When those future goods or services are transferred OR
b) Option expires

4. Does it impacts anywhere because anyway all the amount is ultimately going to be recognized in the revenue then why you need to allocate the price to main goods and additional goods and follow all this lengthy procedure?
-Well, it does impacts? How?
A. Timing of revenue recognition is changing. You are recognizing revenue only for the portion of the obligation/goods/service sold and not for the goods/services (for instance coupon) which are to be sold in future

B. You are also providing for liability for the unsold goods/services/ commitments made by the company

C. By doing so you are preparing your financial statements to the utmost of the accuracy possible

5. Whether on sale of gift card , should revenue be recognized ?
-Please do note that gift card is only a promise by seller that in future he will sell goods/service to you of the gift amount.
-In a way it is prepayment by customer for providing to them goods or services in future
-Hence, only when this gift card is utilized revenue should be recognized
-What if it is not redeemed, then recognize revenue on expiry of the gift card

In short, please note, while accounting nothing is free. If it is free then it is promotional/marketing expenses for the company. It if is bundled with another item then we need to check here is whether that bundle/additional goods is something that only on entering of the main contract they can get benefit of others. In that case, transaction price needs to split between main product and benefit product. Post splitting the price we need to recognize the revenue as and when the performance obligation is satisfied. Meanwhile the revenue related to additional goods should be shown as contract liability. And only on fulfillment of the performance obligation on additional goods or its expiry it shall be recognized in the profit and loss statement as revenue.

Thank you👍✔

Key Note:
1. IFRS 115/IND AS 115 — Provides maximum guidance and emphasis the importance of TIMING for recognizing the revenue. Recognizing revenue before in hand or after in hand both are misleading ways. Hence, the standard have specially dealt with all this items in a separate paragraphs and explanation.
2. In a way all this is very easy but its application will command lot of acute attention to the details, tedious work and continuous monitoring.