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Can someone please help to answer me? Product rebates

Lynette Luong's Profile

eitf 01-9Paragraph 7 of EITF 01-9 states that: "it does not address  the accounting for an offer to a customer, in connection with a current revenue transaction, for free or discounted products or services from the vendor that is redeemable by the customer at a future date without a further exchange transaction with the vendor

1) what the differences between exerciseable and redeemable?

2) can you give an example of "future date without a further exchange transaction" we are in semiconductor business

3) we usually offer like "buy 2 get 1 free,"  should we treat the free product as expense or revenue deduction?

Thanks so much, 

Answers

Steve Kahn
Title: Controller
Company: Carolina Lumber & Supply Co.
(Controller, Carolina Lumber & Supply Co.) |

Let's see if this helps -- on part 3) we usually offer like "buy 2 get 1 free," should we treat the free product as expense or revenue deduction? -- I would guess that your "buy 2 get 1 free" all happens in one transaction, so if a product sells for $x, the total revenues when 3 units are purchased is $2x. If your process would record the sale as $3x, then you should reduce the revenue by $x. If yor process would record the sale as $2x, then you have no revenue issue. On the cost side, the cost of the transaction is $3c, but is your system only records $2c, then you need to recognize the cost of the third unit you gave with the purchase of the 2.
on part 2) can you give an example of "future date without a further exchange transaction" we are in semiconductor business -- I would think of this in the same manner as a coupon for free product where the customer can come in at a later date and get free product without having to purcuase anything else.

Lynette Luong
Title: Accountant
Company: Self
(Accountant, Self) |

Thanks Steve and Phil. But paragraph 10 of EITF states that unlike cash rebate, free products is an expense and not a revenue deduction: "If the consideration consists of a “free” product or service ....the Task Force reached a consensus that the cost of the consideration should be characterized as an expense (as opposed to a reduction of revenue) when recognized in the vendor’s income statement. That is, the “free” item is a deliverable in the exchange transaction and not a refund or rebate of a portion of the amount charged to the customer." If that's the case, shouldn't my revenue is always $3x in your example?

Phil Bolles
Title: Chief Financial Officer
Company: Global Commercial Strategies Group
(Chief Financial Officer, Global Commercial Strategies Group) |

I believe that the problem is that the transaction that you are describing in 3) is a current discount transaction in a single sale - buy 2 get 1 free - and the exclusions referred to in paragraph 7 of EITF 01-9 relate to current discounts from prior transactions ("Buy $100 in merchandise and get a 2% discount on your next purchase") or future discounts from current transactions ("Use the attached coupon for your next purchase"), all of which are covered under EITF 00-21 (ASC 605-25) and EITF 00-22 (ASC 605-50).

I agree with Steve Kahn's answer regarding the "buy 2 get 1 free" transaction, which occurs in a single, current transaction. Consequently, the exclusions in paragraph 7 of EITF 01-9 do not apply to your transaction.

The difference between "exercisable" and "redeemable" are simply terms applied to the "discount" involved. A coupon is redeemable; a right is exercisable. The accounting effect is the same.

Lynette Luong
Title: Accountant
Company: Self
(Accountant, Self) |

Thanks Steve and Phil. But paragraph 10 of EITF states that unlike cash rebate, free products is an expense and not a revenue deduction: "If the consideration consists of a “free” product or service ....the Task Force reached a consensus that the cost of the consideration should be characterized as an expense (as opposed to a reduction of revenue) when recognized in the vendor’s income statement. That is, the “free” item is a deliverable in the exchange transaction and not a refund or rebate of a portion of the amount charged to the customer." If that's the case, shouldn't my revenue is always $3x in your example?

Lynette Luong
Title: Accountant
Company: Self
(Accountant, Self) |
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