Accounting for customer incentives under the recent Revenue standard IFRS15
Determining the correct accounting treatment will depend on some factors. And before start explaining, let me tell you that many companies are accounting for this element in a wrong way and this impact their #revenue recognized and hence its profit.
The correct accounting treatment should follow the below mind mapping by answering the following questions
1. Are you providing the same discounts to all customers purchasing the same value or only to this customer because it is a specific contract? If you are treating this contract as a specific contract hence, it would be a material right.
2. Is the incentive provided to your customer right at the inception of the contract or after it? If your answer states that you give it to your customer at the time contract time, hence it is a material right and then considered as a separate performance obligation.
3. If you provide volume discounts, will they be applied on prospective purchases or retrospectively?
If your answer that you are applying this discounts for prospective purchases then it will be considered a material right. But if you applying these discounts on a retrospective way then it would be a variable consideration.
For all these cases that you have a material right, you need to allocate the transaction price over the separate performance obligation.
I used to teach IFRS for a long time using this mind mapping. #IFRS is simple to be read and understood if you have mind mapping for each standard.
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