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www.pwc.comRetail and consumerIFRS 15 solutionsIFRS15The new revenuerecognitionstandardBeyond theory topracticalapplicationJune 2018

ForewordWe first published ‘Issues and Solutions for the Retail andOur framework focuses on generic issues rather thanConsumer Goods Industries’ in 2008 to providespecific facts and circumstances, and it does notperspectives on a range of financial reporting issuesnecessarily address the exact situations that might arisespecific to the retail and consumer goods (R&C) sector.in practice. Each situation should be considered on theThis publication was refreshed in 2011 and was wellbasis of the specific facts; and, in most cases, thereceived thanks largely due to the Q&A format addressingaccounting treatment adopted should reflect thereal everyday questions from preparers.commercial substance of the arrangements.The issuance of IFRS 15, «Revenue from Contracts withWe encourage you to discuss the facts and circumstancesCustomers», by the IASB has required R&C preparers toof your specific situations with your local PwC R&Cconsider all of their revenue and promotion models usingcontact.the new five step model detailed in the standard. At thesame time, our old publication has been rendered obsoletefor many of the revenue cycle-related solutions.We hope that you find the publication useful inaddressing your own reporting challenges.This publication deals solely with the revenue cyclerelated questions requiring analysis under the newChristine Bouvryguidance. Again, the questions and solutions are derivedfrom the partners in the global PwC network who provideservices to some of the world’s largest R&C companies.Chair, Retail & ConsumerIndustry Accounting GroupWe have combined this knowledge with that of ouraccounting consulting services network to prepare anextensive set of accounting solutions to help youDavid Masonunderstand and debate the issues and explain some of theapproaches often seen in practice. We hope that this willencourage consistent treatment of similar issues acrossthe sector.Retail and consumer – IFRS 15 solutionsPwCRetail & Consumer LeaderGlobal Accounting Consulting ServicesJune 20182

Table of contentsI.II.PwCProduct sales from consumer productscompanies to retailers1.Transfer of control . . 72.Right of return 83.Consignment arrangements 104.Volume discount . 115.Bill-and-hold arrangements . 126.Shipping terms . 13Contractual arrangements betweenconsumer products companies andretailers other than product sales1.Slotting fees 152.Waste disposal payments . 163.Trade incentives – Co-advertising services . 174.Trade incentives – Scan deals . 195.Retail fixture compensation 206.Retail markdown compensation 21

Table of contentsIII. Transactions between end-customersand retailersPwC1.Customer incentives - Buy three, get coupon forone free . 242.Customer incentives – Discount coupons . 263.Customer incentives - Discount coupons / freeproducts rebate 274.Loyalty programs . 295.Gift cards . 316.Right of return 337.Price protection . 358.Internet sales/e-commerce . 37

Table of contentsIV. Transactions between end-customersand consumer products companiesV.1.Customer incentives – Coupons with purchase 392.Customer incentives – Coupon in local paper . 40Licences, Franchises, Royalties1.Right to use brand name 432.Franchise agreements 453.Sales to a franchise 474.Franchise – Non-refundable upfront fee . 48VI. Other considerationsPwC1.Sales of goods – Agent 512.Concession outlet within a department store 533.Excise taxes and duties . 54

I. Product sales fromconsumer productscompanies to retailersRetail and consumer – IFRS 15 solutionsPwCJune 20186

I.1 Transfer of controlBackground CosmeticsCo, a consumer products company, uses a CostCo, a supermarket chain, to supply its products to the endcustomers. CostCo receives legal title and is required to pay for the products on receipt. CostCo has no right of return to CosmeticsC0.When does the consumer products company recognise revenue in accordance with IFRS 15?Relevant guidanceParagraph 31 of IFRS 15: “an entity shall recognize revenue when the entity satisfies the performance obligation bytransferring a promised good or service (that is, an asset) to a customer. An asset is transferred when the customerobtains control of that asset.”Paragraph 33 of IFRS 15: “Control of an asset refers to the ability to direct the use of, and obtain substantially all of theremaining benefits from, the asset. Control includes the ability to prevent other entities from directing the use of, andobtaining the benefits from, an asset. The benefits of an asset are the potential cash flows (inflows or savings inoutflows) that can be obtained directly or indirectly in many ways.”Paragraph 38 of IFRS 15 requires an entity to consider indicators of the transfer of control, which include, but are notlimited to, the following:a.“the customer has a present right to payment b.the customer has legal title to the asset c.the customer has obtained physical possession of the asset d.the customer has the significant risks and rewards of ownership .e.the customer has accepted the asset .SolutionRevenue is recognised by CosmeticsCo when control of the products is transferred. CostCo has physical possession, legaltitle and a present obligation to pay for the asset at the time of receipt of the products. These are all indicators thatcontrol is transferred when the products are delivered to the retailer.Retail and consumer – IFRS 15 solutionsPwCJune 20187

I.2 Right of returnBackground WatchCo uses a wholesale network to supply its products to end-customers. WatchCo sells 100 watches to a retailer for 50 each. The cost of each watch is 10. WatchCo estimates, based on the expected value method, that 6% of watches sold will be returned, and it is highlyprobable that returns will not be higher than 6%. WatchCo has no further obligations after transferring control of the watches.Situation A – Retailer has a contractual right to return the watches for a full refund for a contractually definedperiod.Situation B – Retailer has no contractual right, but WatchCo has a customary business practice where returns havebeen made and accepted.How should WatchCo recognise revenue in accordance with IFRS15?Relevant guidanceParagraph 10 of IFRS 15: “A contract is an agreement between two or more parties that creates enforceable rights andobligations. Enforceability of the rights and obligations in a contract is a matter of law. Contracts can be written, oralor implied by an entity’s customary business practices. The practices and processes for establishing contracts withcustomers vary across legal jurisdictions, industries and entities [ ]. An entity shall consider those practices andprocesses in determining whether and when an agreement with a customer creates enforceable rights andobligations.”A right of return is not a separate performance obligation, but it affects the estimated transaction price for transferredgoods. Revenue is only recognised for those goods that are not expected to be returned.The estimate of expected returns should be calculated in the same way as other variable consideration.a) The estimate should reflect the amount that the entity expects to repay or credit customers, using either theexpected value method or the most likely amount method.b) The transaction price should include amounts subject to return only if it is highly probable that there will not be asignificant reversal of cumulative revenue if the estimate of expected returns change.Paragraph B21 of IFRS 15 requires entities to account for sales with a right of return recognising all of the following:a) “Revenue for the transferred products in the amount of consideration to which the entity expects to be entitled(therefore, revenue would not be recognized for the products expected to be returned)b) A refund liabilityc) An asset (and corresponding adjustment to cost of sales) for its right to recover products from customers onsettling the refund liability.”Retail and consumer – IFRS 15 solutionsPwCJune 20188

I.2 Right of return (cont’d)SolutionSituation ARevenue is recognised when the watches are delivered and aliability deducted from revenue for expected returns.Simultaneously, an asset is recognised for the watches expectedto be returned, reducing the cost of sales. Recognition occurson transfer of control to the wholesaler.The returns asset will be presented and assessed forimpairment separately from the refund liability. WatchCo willneed to assess the returns asset for impairment, and adjust thevalue of the asset if it is impaired.Situation BWatchCo has a customary business practice ofaccepting returns which should be consideredpart of the terms of the contracts with itscustomers.The right of return is accounted for in the samemanner as in situation A.Revenue: Sales price per unit units (excluding those expectedto be returned) 50 100*(1 0.06) watches 4,700Cost of sales: Cost units (excluding those expected to bereturned) 10 94 watches 940Asset: Former carrying amount x units expected to be returned 10 6 watches 60Liability: Return ratio x units sold x sales price per unit6% x 100 watches 50 300 for the refund obligation.Retail and consumer – IFRS 15 solutionsPwCJune 20189

I.3 Consignment arrangementsBackground GardenfurnishingsCo provides teak furniture to a garden centre on a consignment basis. The products areimmediately proposed for sale in the garden centre. GardenfurnishingsCo retains title to the products until they are sold to the end-customer. The garden centre does not have an obligation to pay GardenfurnishingsCo until a sale occurs, and any unsoldproducts can be returned to GardenfurnishingsCo. GardenfurnishingsCo also retains the right to take back any unsold products, or to transfer unsold products toanother retailer. Once the garden centre sells the products to the end-customer, GardenfurnishingsCo has no further obligations, andthe retailer has no further return rights.When does GardenfurnishingsCo recognise revenue in accordance with IFRS 15?Relevant guidanceConsignment arrangements are where an entity ships goods to a distributor but retains control of the goodsuntil a predetermined event occurs. Revenue is not recognised on delivery of the goods to another party if the deliveredproducts are held on consignment.Paragraph B77 of IFRS 15: “When an entity delivers a product to another party (such as a dealer or a distributor) forsale to end-customers, the entity shall evaluate whether that other party has obtained control of the product at thatpoint in time. A product that has been delivered to another party may be held in a consignment arrangement if thatother party has not obtained control of the product. Accordingly, an entity shall not recognise revenue upon delivery ofthe product to another party if the delivered product is held on consignment.”Paragraph B78 of IFRS 15: “Indicators that an arrangement is a consignment arrangement include, but are not limitedto, the following:a) the product is controlled by the entity until a specified event occurs, such as the sale of the products to a customer ofthe dealer or until a specified period expires;b) the entity is able to require the return of the products or transfer the products to a third party (such as anotherdealer); andc) the dealer does not have an unconditional obligation to pay for the products (although it might be required to pay adeposit).”SolutionGardenfurnishingsCo should recognise revenue once the garden centre sells the product to the end-customer. Althoughthe garden centre has physical possession of the products, it does not take title, only a right to sell, and it does not havean unconditional obligation to pay GardenfurnishingsCo. GardenfurnishingsCo retains the right to call back theproducts. Therefore, revenue is not recognised when the goods are delivered to the garden centre in accordance with theguidance in paragraphs B77 and B78 of IFRS 15.GardenfurnishingsCo should also assess whether it is the principal to the transaction with the end-customer. If this isthe case, it would recognise revenue in the amount that was received from the end-customer, and the amount retainedby the garden centre would be recognised as commission expense (see also Section VI).Retail and consumer – IFRS 15 solutionsPwCJune 201810

I.4 Volume discountBackgroundTellieCo, an electronics manufacturer, enters into an arrangement with one of its major retailers, under which theretailer will receive a 5% discount on all purchases if the purchases by the retailer exceed 100,000 for the annualperiod ending 31 December.At 30 June, purchases by the retailer from TellieCo amount to 30,000. TellieCo forecasts that, due to the historicseasonality of the revenues (which peak prior to December in the run-up to the year-end holidays) and the launch ofnew products, the annual sales to the retailer will be in the range of 110,000 120,000.How should TellieCo measure the revenue at 30 June ?Relevant guidanceParagraph 50 of IFRS 15 states: “if the consideration promised in a contract includes a variable amount, an entity shallestimate the amount of consideration to which the entity will be entitled in exchange for transferring the promisedgoods or services to a customer.”Paragraph 51 of IFRS 15: “An amount of consideration can vary because of discounts, rebates, refunds, credits, priceconcessions, incentives, performance bonuses, penalties or other similar items. The promised consideration can alsovary if an entity’s entitlement to the consideration is contingent on the occurrence or non-occurrence of a future event.For example, an amount of consideration would be variable if either a products was sold with a right of return or afixed amount is promised as a performance bonus on achievement of a specified milestone.”According to paragraph 53 of IFRS 15, an entity should estimate an amount of variable consideration by using one oftwo methods - “the expected value” and “the most likely amount” – whichever method is a better prediction of the finaloutcome.According to paragraph 56 of IFRS 15, the transaction price should include some or all of an amount of variableconsideration estimated in accordance with paragraph 53 only to the extent that it is highly probable that a significantreversal in the amount of cumulative revenue recognised will not occur when the uncertainty associated with thevariable consideration is subsequently resolved.SolutionThe transaction price of the goods sold to date includes an element of consideration which is variable or contingent onfuture events. TellieCo must estimate and recognise a liability at 30 June for the amount that it is expected to pay for thevolume discount, and it recognises revenue only to the extent that it is highly probable that a significant reversal will notoccur. TellieCo recognises a provision for the most likely amount that will be payable to the retailer of 1,500 ( 30,000 5%).Retail and consumer – IFRS 15 solutionsPwCJune 201811

I.5 Bill-and-hold arrangementsBackground Consoles AG, a video game company, enters into a contract to supply 100,000 video game consoles to a retailer,Durbin, branded with Durbin’s logo, to be delivered by the end of the year. The contract contains specific instructions from the retailer about where the consoles should be delivered. The retailer expects to have sufficient shelf space at the time of delivery. As of year-end, Consoles AG has shipped 60,000 units and the remaining 40,000 inventory of Durbin-brandedconsoles have been produced, packed and are ready for transport. However, the retailer asks for the shipment to beheld, due to lack of shelf space.When should Consoles AG recognise revenue for the 100,000 units to be delivered to the retailer?Relevant guidanceBill-and-hold arrangements arise when a customer is billed for goods that are ready for delivery, but the entity does notship the goods to the customer until a later date. Entities must assess in these cases whether control has transferred tothe customer, even though the customer does not have physical possession of the goods. Revenue is recognized whencontrol of the goods transfers to the customer.Paragraph B81 of IFRS 15 presents the following additional criteria that all need to be met in order for the customer tohave obtained control in a bill-and-hold arrangement:a) the reason for the bill-and-hold arrangement must be substantive (for example, the customer has requested thearrangement);b) products must be identified separately as belonging to the customer;c) products currently must be ready for physical transfer to the customer; andd) products cannot be used or directed to another customer.SolutionAt the year-end, Consoles AG should recognise revenue for all 100,000 units, because all of the criteria exist for thecontrol of the units to have transferred to Durbin. Since the goods are branded, they can not be directed to anothercustomer, they are clearly identified as belonging to Durbin, and the reason for entering into the transaction issubstantive (that is, lack of shelf space).Retail and consumer – IFRS 15 solutionsPwCJune 201812

I.6 Shipping termsBackground Screens Inc, an electronics manufacturer has an arrangement with a retailer to sell televisions and arrange for theshipping. The delivery terms state that legal title and risk of loss passes to the retailer when the televisions are provided to thecarrier. The retailer does not have physical possession of the televisions during transit, but has legal title at shipment andtherefore can redirect the televisions to another party. Screens is also precluded from selling the televisions to another customer once the televisions have been picked upby the carrier at Screens’ shipping dock.How many performance obligations does Screens have and when should it recognize revenue?Relevant guidanceA performance obligation is a promise to provide a distinct good or service or a series of distinct goods or services asdefined by the revenue standard.IFRS15.22 states that “at contract inception, an entity shall assess the goods or services promised in acontract with a customer and shall identify as a performance obligation each promise to transfer to the customer.”When there are multiple promises in a contract the company must determine whether goods or services are distinct andtherefore separate performance obligations exist.IFRS15.27 states “that a good or service that is promised to a customer is distinct if both of the followingcriteria are met:a) Customer can benefit from good/service on its own or with other resources readily available to the customer(good/service is capable of being distinct)b) Promise to transfer good/service to customer is separately identifiable from other promises in the contract(promise to transfer good/service is distinct within the context of the contract).”IFRS15.33 and IFRS15.35recognition for services.provide useful guidance on transfer of control in general and on over time revenueSolutionThere are two performance obligations: (1) sale of the televisions and (2) if not de-minimos, shipping services.Revenue recognition for sale of televisions: When control transfers to the retailer : in this fact pattern when goods are provided to the carrier Retailer can benefit from the televisions on their own No impact of the shipping service as it is a distinct serviceRevenue recognition for shipping services: When performance occurs, usually over the shipping period Retailer can benefit from the shipping together with the TV that it has already obtainedIn many cases, a third-party carrier will be used to deliver the products. An entity will need to evaluate whether they arethe principal or agent for the shipping services. If they are the agent, revenue should be recognised net of the payment tothe third party carrier (ie. revenue will be the commission income).Retail and consumer – IFRS 15 solutionsPwCJune 201813

II. Contractualarrangements betweenconsumer productscompanies andretailers other thanproduct salesRetail and consumer – IFRS 15 solutionsPwCJune 201814

II.1 Slotting feesBackground ShampooCo, a consumer products company, has a policy of paying ‘slotting fees’ to retailers, in order to have theproducts allocated to advantageous spaces in the retailers’ premises for a defined period of time. For example, theproducts are placed near the checkout counter, to be more noticeable for customers. ShampooCo sells products to CheapCo, a retailer, for 100,000. Simultaneously, it is invoiced 5,000 for a specificplacement in the store which will generate additional sales.How should the retailer account for slotting fees paid by the consumer products entity?Relevant guidanceAn entity should account for consideration payable to a customer as a reduction of the transaction, unless the paymentto the customer is in exchange for a distinct good or service that the customer transfers to the entity.A good or service that is promised to a customer is distinct if both of the following criteria are met (by virtue ofparagraph 27 of IFRS 15):a) Customer can benefit from good/service on its own or with other resources readily available to thecustomer (ie the good/service is distinct).b) The entity’s promise to transfer good/service to customer is separately identifiable from other promisesin the contract (promise to transfer good/service is distinct).Furthermore, paragraph 71 of IFRS 15 requires that, if an entity cannot reasonably estimate the fair value of the good orservice received from the customer, it sshould account for all of the consideration payable to the customer as a reductionof the transaction price.SolutionSlotting fees would not occur without the purchase of goods from the consumer products company, and they aretherefore highly dependent on the purchase of the products. Thus, slotting fees are not distinct and should be accountedfor as a reduction of the selling price. ShampooCo recognises the slotting fees as a reduction of revenue.Retail and consumer – IFRS 15 solutionsPwCJune 201815

II.2 Waste disposal paymentsBackgroundIn some countries, consumer products companies are obliged to take back or dispose of the transport packaging whenselling goods to their retailers. In practice, retailers usually take over the responsibility for disposing of the transportpackaging. In return, they receive a refund from the consumer products company as compensation (waste disposalpayment).How should the consumer products company recognise the payment made to the retailer for thedisposal of the transport packaging?Relevant guidanceAn entity should account for consideration payable to a customer as a reduction of the transaction, unless the paymentto the customer is in exchange for a distinct good or service that the customer transfers to the entity.A good or service that is promised to a customer is distinct if both of the following criteria are met (by virtue ofparagraph 27 of IFRS 15):a) Customer can benefit from good/service on its own or with other resources readily available to thecustomer (ie the good/service is distinct).b) The entity’s promise to transfer good/service to customer is separately identifiable from other promisesin the contract (promise to transfer good/service is distinct).If the amount of consideration payable to the customer exceeds the fair value of the distinct good or service that theentity receives from the customer, the entity should account for such an excess as a reduction of the transaction price.If the entity cannot reasonably estimate the fair value of the good or service received from the customer, it shouldaccount for all of the consideration payable to the customer as a reduction of the transaction price (under paragraph71 of IFRS 15).SolutionConsumer products companies could dispose of the transport packaging themselves, or they could engage a third partyto provide the service. Therefore, the disposal service provided by the retailer is distinct and separately identifiable.The payment should be accounted for in the same way that the consumer products company accounts for otherpurchases or services provided by suppliers. The amount paid will be recognised as an expense by the consumerproducts company.However, if the amount paid for the service does not reflect its fair value, the portion of the cost above the fair valueshould be accounted for as a reduction of the revenue generated from sales to the retailer.Retail and consumer – IFRS 15 solutionsPwCJune 201816

II.3 Trade incentives – Co-advertising servicesBackgroundHiccup plc, a beverage producer, has entered into agreements with two of its customers (Retailer A and Retailer B) inrelation to product advertising and promotion.Retailer AHiccup plc has entered into an advertising arrangement with Retailer A, under which advertisements are to bepublished in a local newspaper. Hiccup plc has had arrangements in the past directly with the local newspaper and,absent the arrangement with the retailer, would advertise locally.Retailer A will contract directly with the local newspaper and pay for the full cost of the campaign. Under a separatecontractual arrangement with Retailer A, Hiccup plc has committed to reimburse 50% of the advertising costs. In orderfor Hiccup plc to reimburse Retailer A, it requires Retailer A to place adverts and provide the associated proof ofplacement in the local newspaper.Retailer BHiccup plc also enters into a contract with Retailer B, under which Retailer B is entitled to an advertising allowance of 10m if it advertises Hiccup plc’s goods on advertising boards and in its publicity mailings with certain regularitythroughout the year. Retailer B only advertises brands that it lists/sells.How should these transactions be recorded?Relevant guidanceAn entity should account for consideration payable to a customer as a reduction of the transaction, unless the paymentto the customer is in exchange for a distinct good or service that the customer transfers to the entity.A good or service that is promised to a customer is distinct if both of the following criteria are met (by virtue ofparagraph 27 of IFRS): Customer can benefit from good/service on its own or with other resources readily available to the customer (ie thegood/service is distinct) The entity’s promise to transfer good/service to customer is separately identifiable from other promises in thecontract (promise to transfer good/service is distinct) If the amount of consideration payable to the customer exceeds the fair value of the distinct good or service that theentity receives from the customer, the entity should account for such an excess as a reduction of the transactionprice. If the entity cannot reasonably estimate the fair value of the good or service received from the customer, itshould account for all of the consideration payable to the customer as a reduction of the transaction price (underparagraph 71 of IFRS 15).Retail and consumer – IFRS 15 solutionsPwCJune 201817

II.3 Trade incentives – Co-advertising services(cont’d)SolutionArrangement with Retailer AThe payment to Retailer A is for a distinct service. Hiccup plc has previously purchased similar advertising at similarpricing, and Hiccup plc could have entered into this arrangement whether or not Retailer A is a customer.The fair value of the advertising services can be reasonably estimated, and Hiccup plc is paying Retailer A fair value forsuch services. Hiccup plc recognises the advertising costs as an expense in the income statement.Arrangement with Retailer BHiccup plc is unable to identify a distinct service and/or separate the arrangement from the underlying customerrelationship and sales/purchase arrangement. Therefore the amounts due by Hiccup plc to Retailer B would berecognised as a reduction of Hiccup plc’s revenue.Case-by-case assessmentIn many circumstances, trade incentives might vary depending on local practices between consumer productscompanies and retailers. It might often be difficult to determine if a service can be considered as distinct or not.Retail and consumer – IFRS 15 solutionsPwCJune 201818

II.4 Trade incentives – Scan dealsBackgroundScan deals are agreements that involve a joint promotional campaign between consumer goods companies and retailers.The agreements generally specify that the seller grants reduced prices to retailers who, at the same time, offerpromotional prices to consumers. Showergel, a consumer goods company, and a retailer agree that, for a period of two months, all sales of certainproducts will be subject to a special promotional price. The promotional period of two months will coincide withShowergel’s media campaign for the products. Showergel does not have an established practice of scan deals. Showergel’s normal selling price to the retailer is 80; the selling price from the retailer to consumers is 100. Showergel and the retailer agree that both of their respective prices will be reduced by 20%. The reductions in priceapply only to goods sold in the promotional period. The retailer reports unsold discounted products to Showergel at the end of the promotional period, and it reimbursesany unearned discount.How does Showergel account for the discount arising from scan deals?Relevant guidanceParagraph 47 of IFRS 15: “An entity shall consider the terms of the contract and its customary business practices todetermine the transa

Retail and consumer –IFRS 15 solutions June 2018 Solution Situation A Revenue is recognised when the watches are delivered and a liability deducted from revenue for expected returns. Simultaneously, an asset is recognised for the watches expected to be returned, reducing the cost of sales. .