Both IFRS and ASPE account for discounts in a similar manner: discounts should be netted from Revenue amounts. They are not considered Expenses, and should not be included in that category. So when we calculate our Revenue figure, we should always deduct any sales discount from this figure.
There are two methods an entity can use when accounting for discounts. The first is to create a “contra-revenue” account and the second is to simply net the discount immediately off of the Revenue figure. Both methods have the same effect. A contra-revenue account is not an account that is shown in the entity’s Financial Statements. It is simply a placeholder account that the entity uses to keep track of their discounts. When preparing the year-end financial statements, the contra-revenue account is netted from the Revenue account, resulting in a Revenue figure net of all discounts. Sample journal entries using discounts can be found in a later post.
We explore how to recognize discounts in different situations, below.
Coupons
Coupons are sales discounts on items. Examples of coupons include: 20% off purchase of $100 or more, 10% store-wide coupon, 50% off of your purchase of X service/item, etc...
When coupons are issued, the entity will not recognize anything in its books until the coupon is redeemed. When the coupon is redeemed, the Revenue is recorded either net of the discount coupon immediately, or the discount is first recorded in the contra-revenue account, and then later netted off of the Revenue figure.
Bundled Deliverable Discounts
Bundled deliverable discounts are sales discounts based on purchasing either multiple items, or items in a bundle.
Examples of bundled discounts include promotions such as: buy 1 get 1 free, buy 1 get the second 30% off, 50% off with the purchase of 2 or more items, etc… In these situations, the seller is providing a discount based on multiple purchases or a bundle purchase.
Allocating Revenue and discounts to bundled deliverables is covered in a prior post. As a recap, both IFRS (IFRS 15, Paragraph 81) and ASPE require that if the bundled deliverables are sold at a discount, then that discount should be allocated proportionally among the different components.
For example, in the case of an offer of: buy 1, get one 50% off, the entity would need to determine the pro-rated discount to be applied to each item, and recognize this accordingly.
Illustrative Example
A client purchases two items: A dress for $100 and a pair of shoes for $50. Your "buy-1-get-1-50% off" discount coupon says that the 50% off is applied to the cheaper item. In this case your buyer will pay $125 ($100 + ($50 x 50%)) for the dress and shoes combined.
The pro-rated net Revenue on the items together is:
Total Discounted Price / Total Original Price = ($100 + ($50 x 50%)) / ($100 + $50) = 83.33%
Revenue allocated to the dress = Pro-rated Revenue Percentage x Original Price of Dress = 83.33% x $100 = $83.33
Revenue allocated to the shoes = Pro-rated Revenue Percentage x Original Price of Shoes = 83.33% x $50 = $41.67
Exceptions
Under IFRS 15 (Paragraph 82), there are some exceptions to pro-rating. If all of the following criteria are met, then we must allocate the discount to entirely one or more components:
“the entity regularly sells each distinct good or service (or each bundle of distinct goods or services) in the contract on a stand-alone basis; AND
the entity also regularly sells on a stand-alone basis a bundle (or bundles) of some of those distinct goods or services at a discount to the stand-alone selling prices of the goods or services in each bundle; AND
the discount attributable to each bundle of goods or services is substantially the same as the discount in the contract and an analysis of the goods or services in each bundle provides observable evidence of the performance obligation (or performance obligations) to which the entire discount in the contract belongs.” (IFRS 15, Paragraph 82)
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