Chapter 2
Premium Liability
M. MANAYAO, CPA, MBA
Learning Objectives
Know the recognition of a premium liability.
Know the recognition of coupons for free product.
Know the recognition of coupons for discount.
Know the recognition of coupons for rebates.
Understand the recognition and measurement of a
customer loyalty program.
Premiums
Premiums are articles of value such as toys, dishes,
silverware and other goods given to customers as result of
past sales or sales promotion activities.
Inorder to stimulate the sale of their products, entities offer
premiums to customers in return for product labels, box
tops, wrappers and coupons.
Accordingly, when the merchandise is sold, an accounting
liability for the future distribution of the premium arises and
should be given accounting recognition.
Premiums
The accounting procedures for the acquisition of premiums
and recognition of the premium liability are as follows:
When the premiums are purchased:
Premiums xxx
Cash xxx
When the premiums are distributed to customers:
Premium expense xxx
Premiums xxx
At the end of the year, if premiums are still outstanding:
Premium expense xxx
Estimated premium liability
Let’s Try This!!!
Problem 2-1
Cash 3,600,000
Sales 3,600,000
Premiums – Plate 390,000
Cash 390,000
Cash (5,000 x 10) 50,000
Premium expense (5,000 x 40) 200,000
Premiums – Plate (5,000 x 50) 250,000
Let’s Try This!!!
Premium expense (5,000 x 20) 100,000
Cash 100,000
Premium expense (2,000 x 60) 120,000
Estimated premium liability 120,000
2022
Estimated premium liability 120,000
Premium expense 120,000
Let’s Try This!!!
2022
Cash 4,200,000
Sales 4,200,000
Premiums – Plate 580,000
Cash 580,000
Cash (9,000 x 10) 90,000
Premium expense (9,000 x 40) 360,000
Premiums – Plate (9,000 x 50) 450,000
Let’s Try This!!!
Premium expense (9,000 x 20) 180,000
Cash 180,000
Premium expense (3,000 x 60) 180,000
Estimated premium liability 180,000
Free Product, Discount and Rebate
In a contract of sale of goods, an entity may offer customer
incentives such as free product coupons, discount coupons
and rebate coupons with the end in view of stimulating sales.
Options to purchase additional goods provide the customer a
material right and therefore gives rise to a performance
obligation that the seller must satisfy.
Ifthe options provide a material right to the customer, the
customer in effect pays the seller in advance for future
delivery of additional goods.
Free Product, Discount and Rebate
The entity has two performance obligations in these
customer options, namely:
1. To deliver or transfer the goods or products sold.
2. To satisfy the customer options for coupons for free
product, discount and rebate.
The allocated transaction price of the customer options shall
be deferred and recognized as income when options are
exercised or when the options expire.
Rebate Coupons
Manufacturers sell their products to retailers who in turn sell
them to end-customers. End-customers may receive coupons
for discounts if they purchase the same product from the
retailers in the future.
Sincethe retailers shall receive a lower consideration due to
the discount, manufacturers may reimburse them for such
discount.
Ineffect, the manufacturer would recognize a refund liability
or rebate liability to the retailers. Such liability is reduced
when the manufacturer reimburses the retailers.
Gift Certificates
Department stores may sell gift certificates or gift cards to
customers in exchange for future delivery of goods. The gift
certificates are usually non-refundable and therefore the
seller should consider that some customers might not
redeem such certificates.
Under PFRS 15, the nonredemption of the gift certificates is
referred to as “breakage”.
Theseller shall recognize revenue from breakage based on
the value of certificates redeemed in proportion to the
expected value of certificates to be redeemed.
Customer Loyalty Program
Many entities use a customer loyalty program to build
brand loyalty, retain their valuable customers and of
course, increase sales volume.
The customer loyalty program is generally designed to
reward customers for past purchases and to provide
them with incentives to make further purchases.
Customer Loyalty Program
Ifa customer buys goods or services, the entity grants
the customer award credits often described as
"points".
The entity can redeem the "points" by distributing to
the customer free or discounted goods or services.
Customers may be required to accumulate a specified
minimum number of award credits or "points" before
they can be redeemed.
Measurement
Anentity shall account for the award credits as a separate
component of the initial sale transaction.
Inother words, the granting of award credits is effectively
accounted for as a future delivery of goods or services.
IFRS 15, paragraph 74, provides that an entity shall allocate
the transaction price to each performance obligation
identified in a contract on a relative stand-alone selling price
basis.
Measurement
Inother words, the fair value of the consideration received
with respect to the initial sale shall be allocated between
the award credits and the sale based on relative stand-alone
selling price.
Thestand-alone selling price is the price at which an entity
would sell a promised good or service separately to a
customer.
Recognition
The consideration allocated to the award credits is
initially recognized as deferred revenue and
subsequently recognized as revenue when the award credits
are redeemed.
The amount of revenue recognized shall be based on the
number of award credits that have been redeemed relative
to the total number expected to be redeemed.
Application of
concepts
QUESTIONS????
REACTIONS!!!!!
END
