Key issues under IFRS® Accounting Standards and US GAAP
From the IFRS Institute – December 8, 2023
It’s been several years already since IFRS 151 and Topic 6062 became effective, but implementation issues continue to arise. Lately, new business models and contracting practices have put the guidance on consideration payable to a customer to the test. In this article, we explain why and when equity and cash incentives remitted to customers, customers’ customers and others within the broader distribution chain reduce revenue and why the International Accounting Standards Board (IASB) has received feedback in this area.
Under both IFRS Accounting Standards and US GAAP, the ‘transaction price’ is the amount of consideration to which a company (vendor) expects to be entitled in exchange for transferring goods or services to a customer, excluding amounts collected on behalf of third parties − e.g. some sales taxes. To determine the transaction price, a company considers, amongst other things, the effect of consideration payable to a customer.
Determining this effect can be challenging because, depending on facts and circumstances, consideration payable to a customer may represent a reduction of the transaction price, a payment for distinct goods or services, or a combination of the two.
Consideration payable to a customer includes both cash and noncash amounts such as:
These payments are often specified in the contract. However, implied payments also can represent consideration payable to a customer. Determining how broadly payments within a distribution chain should be evaluated requires judgment. Robust processes are also needed to identify the population of items to evaluate.
Let’s first understand how to account for consideration payable to a customer. Then, we’ll look at two trending examples: equity-based payments to customers and incentives granted by platform companies.
Under both IFRS Accounting Standards and US GAAP, consideration payable to a customer reduces the transaction price, unless the payment is for a distinct good or service that the customer transfers to the company. When the payment is for a distinct good or service, the payment is instead accounted for like other purchases from suppliers, with two exceptions.
Further, when consideration payable to a customer reduces the transaction price, the reduction is either accounted for as variable consideration or subject to the ‘later of’ guidance, as follows.
| Variable consideration approach | The company estimates the variable amount at contract inception and includes that amount in the transaction price. The transaction price is recognized as revenue when (or as) control of the goods or services is transferred. |
| ‘Later of’ guidance approach | The payments are recognized as a reduction of revenue as the later of the date when the related revenue is recognized or the company promises to pay such consideration (which can be implied). |
To determine which approach applies, a company evaluates its past practice and other activities that could give rise to an expectation at contract inception that the transaction price includes a variable amount. For example, in the case of a customer incentive, at contract inception a company evaluates whether it intends to provide an incentive or if the customer has a reasonable expectation that an incentive will be provided. If yes, then the incentive constitutes variable consideration, even though it may be in the form of consideration payable to a customer.
The ‘later of’ guidance applies only if the company concludes at contract inception that the contract does not have variable consideration or if the contract at inception includes a fixed payment to a customer.
From the above, one would conclude that accounting for consideration payable to a customer is generally the same under IFRS Accounting Standards and US GAAP and consistent across companies. However, the accounting calls for many judgments and, depending on the nature of the payments, it may involve guidance beyond the revenue standard that is not converged between IFRS Accounting Standards and US GAAP. This may lead to varying outcomes as further explained in this article.
IllustrationStart-up A manufactures widgets and distributes them through Retailer B’s website. Upon reaching certain sales volume milestones, A has agreed to issue warrants to B for no consideration, as a mechanism to secure its commercial relationship with B. |
Granting equity-based instruments to customers has become more prevalent as companies look to preserve cash and/or customers express interest in receiving equity. Depending on facts and circumstances, such arrangements may represent consideration payable to a customer.
Under US GAAP’s Topic 606, consideration payable to a customer includes equity-based instruments (liability- or equity-classified) granted to a customer in conjunction with selling goods or services to the customer. Therefore, these equity-based instruments reduce revenue in the same manner as if the company made a cash payment to the customer, unless they represent a fair value payment for a distinct good or service. Topic 606 requires that the equity-based instruments be measured and classified using the share-based payment guidance3, resulting in the transaction price being reduced by the grant-date fair value for vested awards whether equity-classified and liability-classified. The adjustments from the subsequent remeasurement of a liability-classified instrument are recorded elsewhere in the company’s income statement – meaning they do not affect revenue.
Unlike US GAAP, IFRS 15 is silent about equity-based instruments remitted to a customer. Therefore, under IFRS Accounting Standards, the guidance on financial instruments in IFRS 94 and IAS 325 applies to address the following:
In the absence of specific requirements under IFRS 15, a company should apply judgment to determine whether to measure noncash consideration payable to the customer with reference to the date on which the contract is entered into, the date the noncash consideration is received or the date the performance obligation is satisfied.
In the KPMG comment letter to the IASB for the post-implementation review of IFRS 15, we recommended the IASB consider amending IFRS 15 to align with US GAAP − i.e. require equity-based instruments issued as consideration payable to a customer to be measured and classified using the requirements of share-based payment guidance (IFRS 2).
IllustrationCompany Z operates a food delivery platform through which end users can order food from one of the restaurants registered with the platform. The food is then prepared by the selected restaurant. Z offers end users incentives, such as discounts or cash back. |
In recent years, platform companies – e.g . food ordering platforms, ride hail platforms, online ticket sellers and discount websites – have thrived. These business models have in common the fact that multiple parties are involved in providing goods or services to end users. Typically in these arrangements, the platform company will provide incentives to the end users.
To apply the consideration payable to a customer guidance in these arrangements, the platform company determines its customer(s) among the various parties. When the platform company identifies both the end users and the good/service provider as its customers, all incentives reduce the transaction price.
However, there may be situations where the platform company is acting as an agent in selling a good/service to end users and identifies only the good/service provider as its customer. Therefore, the party to which it makes incentive payments (i.e. the end user) is not its customer and is not within the direct distribution chain. In this case, the platform company needs to apply judgement to determine whether these payments represent consideration payable to a customer, i.e. as implied price concessions to the customer.
The SEC staff has expressed a view6 that the evaluation considers not only contractual obligations to the customer but also any implied promises to provide incentives to the customer’s customer. An implied promise may exist if the platform company’s incentive promotion or program is ‘reasonably knowable’ to the company’s customers.An incentive promotion or program may be reasonably knowable to a customer when the benefit is visible to the customer (e.g. via a platform app, website, e-mails, or other forms of communications that are accessible by the customer) such that the customer is reasonably aware that end users of the platform are receiving benefits on purchases and therefore has a reasonable expectation that incentives will be provided to its customers. Therefore, many platform incentives to a customer’s customer are recorded as a reduction of revenue.
In the KPMG comment letter to the IASB for the post-implementation review of IFRS 15, we recommended the IASB clarifies what the circumstances are, if any, in which an amount paid to a customer’s customer (that does not relate to a distinct good or service) is not treated as consideration payable to a customer.
Companies should develop a process for evaluating whether any payments made to a customer or a customer’s customer are consideration payable that requires further evaluation under the revenue standard. Judgments should be well-documented and reviewed periodically as business models evolve.
The IASB is conducting its post-implementation review of IFRS 15 to assess its effectiveness. The initial feedback request period for the PIR closed in October 2023. One area many respondents to the initial feedback request identified as being unclear is the consideration payable to a customer requirements. We encourage preparers to monitor the IASB’s progress as future years may bring standard setting in this area.
For more information, please read KPMG comment letter to the IASB and refer to KPMG US GAAP revenue recognition handbook and IFRS 15 handbook.
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