Accounting for Customer Incentives

Extract

[...] Guidance FASB Codification 605-50-45-1 FASB Codification 605-50-25-3 IFRS 15 Application FASB Codification 605-50-45-1: This is a provision under the Financial Accounting Standards Board, to the effect that a vendor may give a customer a sales incentive or other consideration. An adjustment of the product's selling price or the price of the service will therefore be treated as a reduction in revenue in the income statement of such a vendor (GAAP 1). In such a case, the sales revenue is to be debited by such an amount and a liability account is to be credited by the same. [...]

[...] Accounting for Customer Incentives Background In an effort to increase its customer base, Runway implemented a customer referral marketing campaign. Here, existing customers of Runway can refer a friend to it and receive $25 credit towards purchase of future merchandise. The terms and conditions are that the existing customer should refer a friend to Runway's website, and the new customer should purchase merchandise from the retail company. Upon such purchase, the existing customer receives a $25 credit to be applied to a future purchase from the company. [...]

[...] The GAAP post.com. Nd. Web October Pg 1 Joel, Steinberg. "Accounting changes for sales incentives cause restatements." The CPA Journal (2003): Pg 1. [...]

[...] It is therefore important to note that the $25 referral credit extended to existing customers by Runway cannot be considered as a marketing expense. This is because it involves a cash consideration, in that the customer will be able to purchase a product in future by paying $25 less the price. Also, it cannot be classified as a true marketing expense, as Runway retailers are not seen to be parting with anything as a consideration towards the same at the time of offer. [...]