Chapter 2
Premium Liability
Premiums
Are articles of value such as toys, dishes, silverwares and other goods given to customers as result of past
sales or sales promotion activities.
Accordingly, when the merchandise in sold, an accounting liability for the future distribution of the
premium arises and should be given accounting recognition.
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 xxx
Illustration
An entity manufactures a certain product and sells it at P300 per unit.
A soup bowl is offered to customers on the return of 5 wrappers plus a remittance of P10.
The bowl costs P50, and it is estimated that 60% of the wrappers will be redeemed.
The data for the first year concerning the premium plan are summarized below.
Sales, 10,000 units at P300 each 3,000,00
Soup bowls purchased, 2,000 units at P50 each 100,000
Wrappers redeemed 4,000
Expected no. of premium to be distributed * Premium expense per unit=Premium Expense
No. of units sold xxx Costs of premium xxx
* Expectations % % Other costs xxx
No. of coupons xxx Remittance (xxx)
Div. no. of coup. req. xxx Premium per unit xxx
Exp. no. of prem xxx
The entries that would be made in the first year to record the sales, premium purchases and redemption, and year-
end adjustment are:
1. To record the sales:
Cash 3,000,000
Sales 3,000,000
2. To record the purchase of the premiums:
Premiums - soup bowls 100,000
Cash 100,000
3. To record the redemption of 4,000 wrappers:
Cash (800x10) 8,000
Premium expense (800x40) 32,000
Premiums – soup bowls (800x50) 40,000
4. To record the liability for the premiums at the end of the first year:
Premium expense 16,000
Estimated premium liability 16,000
Computation
Wrappers to be redeemed (60%x10,000 wrappers) 6,000
Less: Wrappers redeemed 4,000
Balance 2,000
Premiums to be distributed (2,000/5) 400
Estimated liability (400x40) 16,000
Financial statement classification
At the end of the year, the accounts related to the premium plan are classified as follows:
Current asset:
Premiums – soup bowls 60,000
Current liability:
Estimated premium liability 16,000
Distribution cost:
Premium expense 48,000
Cash rebate program
Cash register receipts, bar codes, rebate coupons and other proof of purchase often can be mailed to
the manufacturer for cash rebate.
The purpose of the cash rebate program is to stimulate sales.
Accordingly, the estimated amount of the cash rebate should be recognized both as an expense and an
estimated liability in the period of sale.
Illustration
An entity offered P500 cash rebate on a particular model of TV set. The customers must present a rebate coupon
enclosed in every package sold plus the official receipt.
Past experience indicates that 40% of the coupons will be redeemed.
During the current year, the entity sold 4,000 TV sets and total payments to customers amounted to P450,000.
1. To recognize the cash rebate program:
Rebate expense 800,000
Estimated rebate liability 800,000
Rebate coupons issued 4,000
Expected to be redeemed 40%
Coupon rebates to be redeemed 1600
Cash rebate per coupon 500
Estimated rebate liability 800,000
2. To record the payments to customers:
Estimated rebate liability 450,000
Cash 450,000
Cash discount coupon
The cash discount coupon program is a popular marketing tool for the purpose of stimulating sales.
An expense and an estimated liability for the expected cash discount should be recognized in the period of
sale.
Illustration
During the current year, an entity inserted in each package sold a coupon offering P300 off the purchase price
of a particular brand of product when the coupon is presented to retailers.
The retailer are reimbursed for the face amount of coupons plus 10% for handling. Previous experience
indicates that 30% of coupons will be redeemed.
During the current year, the entity issued coupons with face amount of P5,000,000 and total payments to
retailers amounted to P1,000,000.
1. To recognized the cash discount coupon offer:
Cash discount coupon expense 1,650,000
Estimated coupon liability 1,650,000
Face amount of coupons to be redeemed (30%x5,000,000) 1,500,000
Multiply by (100% face plus 10% handling) 110%
Total coupon liability 1,650,000
2. To record payments to retailers:
Estimated coupon liability 1,100,000
Cash 1,100,000
Customer loyalty program – IFRS 15
Generally designed to reward customers for past purchases and to provide them with incentives to make
further purchases.
If a 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
Award credits
Fair value of the consideration received with
respect to the initial sale (transaction price)
Stand-alone selling
price
Stand-alone selling price – is the price at which an entity would sell a promised good or service
separately to a customer.
Recognition
Initially recognized at DEFERRED REVENUE
Award Credit
Subsequently recognized as REVENUE when the awards 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.
The estimated redemption rate is assessed each period. Changes in the total number expected to be redeemed
do not affect the total consideration for the award credits.
The calculation of the revenue to be recognized in any one period is made on a “cumulative basis” in order
to reflect the changes in estimate.
Illustration – IFRS 15
An entity, a grocery retailer, operates a customer loyalty program.
The entity grants program members loyalty points when they spend a specified amount on groceries.
Program members can redeem the points for further groceries. The points have no expiry date.
The sales during 2020 amounted to P9,000,000 based on stand-along selling price.
During 2020, the customers earned 10,000 points.
But management expects that 80% or 8,000 of these points will be redeemed.
The stand-alone selling price of each loyalty points is estimated at P100.
On December 31, 2020, 4,000 points have been redeemed in exchange for groceries.
In 2021, the management revised expectations and now expects that 90% or 9,000 points will be redeemed
altogether.
During 2021, the entity redeemed 4,100 points. In 2022, a further 900 points are redeemed.
Management continues to expect that only 9,000 points will ever be redeemed, meaning, no more points will
be redeemed after 2022.
Allocation of transaction price
Product sales 9,000,000
Points – Stand-alone selling price (10,000x100) 1,000,000
Total 10,000,000
Product sales (9,000,000/10,000,000x9,000,000) 8.100,000
Points (1,000,000/10,000,000x9,000,000) 900,000
Total transaction price 9,000,000
Journal entries
The initial sale in 2020 is recorded as follows:
Cash 9,000,000
Sales 8,100,000
Unearned revenue – points 900,000
Redemption of 4,000 points in 2020
Unearned revenue – points 450,000
Sales 450,000
Revenue to be recognized in 2020 – (4,000/8,000x900,000) 450,000
Redemption of 4,100 points in 2021
Unearned revenue – points 360,000
Sales 360,000
Points redeemed in 2020 4,000
Points redeemed in 2021 4,100
Total points redeemed to December 31, 2021 8,100
Cumulative revenue on December 31, 2021
(8,100/9,000x900,000) 810,000
Revenue recognized in 2020 (450,000)
Revenue to be recognized in 2021 360,000
Redemption of 900 points in 2022
Unearned revenue – points 90,000
Sales 90,000
Points redeemed in 2020 4,000
Points redeemed in 2021 4,100
Points redeemed in 2022 900
Total points redeemed to December 31, 2022 9,000
Cumulative revenue – December 31, 2022
(9,000/9,000x900,000) 900,000
Cumulative revenue – December 31, 2021 (810,000)
Revenue to be recognized in 2022 90,000
Third party operates loyalty program
An entity, a retailer of electrical goods, participates in a customer loyalty program operated by an airline.
The entity grants program members one air travel points for every P1,000 spent on electrical goods.
Program members can redeem the points for travel with the airline subject to availability. The entity pays
the airline P60 for each point.
During the current year, the entity sold electrical goods for consideration totaling P4,500,000 based on
stand-alone selling price and granted 5,000 points with stand-alone selling price of P100 per point.
Selling price Fraction Allocated
Product sales 4,500,000 45/50 4.050,000
Points (5,000x100) 500,000 5/50 450,000
5,000,000 4,500,000
Revenue from points 450,000
Payment to airline (5,000x60) (300,000)
Net revenue from points 150,000
To record the initial sale
Cash 4,500,000
Sales 4,050,000
Revenue from points 450,000
To record payment to airline
Loyalty program expense 300,000
Cash 300,000
