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Discounts, loyalty awards and warranties: Are you recording them correctly?

A1When you sell a product a discount in the form of a volume discount or an early settlement discount may be given to the customer. Another way of encouraging customers to buy from you is to offer a loyalty award. The selling price of a product can also include a provision for a warranty for after-sales service supplied to the customer. 

Volume discounts

The seller can offer a volume discount on the selling price if a customer buys or orders products in excess of an amount or volume as determined by the seller.

An example of a volume discount would be when the seller offers a 10% discount on the selling price of products sold to the customer if the customer buys products to the value of more than R10 000. Alternatively, a discount of 10% may be offered if the customer buys more than 50 units of a certain product.

The amount of a volume discount will be recorded as a reduction in the selling price paid by the customer, thus decreasing revenue in the seller’s books.

Early settlement discounts

An early settlement discount is offered by the seller to customers to encourage them to settle their accounts in a shorter time period than the normal credit terms.

For example, the seller offers customers a discount of 5% if a customer settles their account within 30 days from date of statement instead of the normal credit terms of 60 days.

The seller will record the amount of the early settlement discount as a reduction in the selling price paid by the customer. Once again, the amount of the early settlement discount will reduce revenue in the seller’s books.

Loyalty awards

A loyalty award may be granted to customers in terms of which a customer earns a certain amount of loyalty points based on the amount they spend. The loyalty points can be converted to a Rand value and used by the customer towards paying for products/services in the future.

An example would be where a customer earns one point for each R10 spent on the seller’s products. After the customer earned 500 points, the points are converted to Rands at a rate of 20 cents per point. The loyalty award will come to an amount of R10 (500/10 x 0,20). The customer can then use the loyalty award of R10 towards payment of a next purchase from the seller.

The fair value of the consideration of a transaction subject to a loyalty award must be proportionately allocated between the award credits and the balance of the other components of the sale. The portion of the fair value allocated to the award credits are deferred until the seller fulfils its obligation to supply the loyalty credits. The seller will fulfil this obligation when the customer redeems the loyalty credits.

Warranties/Guarantees

The seller may include an amount as warranty for after-sales service to the customer as part of the sales transaction.

For example, included in the selling price of R5 000 for a lawnmower is an amount of R150 for a standard service six months after purchase date. The seller must defer the portion of the selling price related to the warranty. The deferred amount will be recognised as revenue during the financial period in which the seller fulfils its warranty obligation.

The examples discussed in this article are simple as each example only involves one of the four topics above. In practice, transactions can become much more complicated as a transaction may be subject to two or more of the above terms of payment, in any combination.

If you would like more information about this topic, please contact us for professional assistance and advice.

This article is a general information sheet and should not be used or relied on as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. 

Reference List:

  • IFRS for SMEs by IASB
  • Training Material for the IFRS for SMEs by the IFRS Foundation
  • IFRS for SMEs – A summary by W Consulting and SAICA