message for steve

cornflower

Steve

Can you tell me your opinion. We offer rebates to our customers if they purchase over a certain level each month.

My boss wants to reduce this months sales by next months rebate but I think this is wrong (moraly and ethicallyY

This has caused a stir in our office! Is my boss right. I don't think so.

Steve Collings

You will probably need to go into some more detail about this!

However I think the information you need to be directed to is in Application Note G of FRS 5 (Revenue Recognition).

Volume or settlement discounting (also known as 'overriders') are quite common these days. I did a lecture on something similar a while back where I cited a paint manufacturer! The paint manufacturer had a 31 December year end and offered rebates to its larger customers based on the following volumes:

Up to 100,000 litres - zero discount
Between 100,000 and 250,000 litres - 5% discount on all sales
Over 250,000 litres - 10% discount on all sales.

I said that rebates were to be paid after the end of their contract year (I know you are doing this monthly, but the principles are still the same).

If a particular customer of the paint manufacturer's had purchased 140,000 litres of paint in the year and always had a past history of purchasing over 250,000 litres of paint each contract year (running from 1 July to 30 June), spread evenly over the year then the paint manufacturer has a contractual liability to pay the customer a rebate of 5% on all sales todate because the volume threshold of 100,000 litres has been exceeded. However, based on available evidence it is more likely than not that the customer will also exceed the 250,000 litres which will result in the paint manufacturer paying a rebate of 10%.

In these circumstances a provision should be made to reduce revenue by 10% of the sales todate.

In summary, the application note does require that the amount of revenue recognised under such an arrangement is reduced by the amount of the discount AT THE TIME OF SALE.

So your boss (could well be) correct, depending on the terms.......

Kind regards

steve

Toffeemadblue

I have no idea what the correct accounting treatment would be, but we give and recieve a variety of retrospective discounts based on turnover levels, invariably these are paid via credit notes raised in the subsequent period. Therefore when we calculate the turnover for the next period we add back on the value of the credit note as this seems to us to both fair and within the spirit of the retrospective discount deal offered.

lork

We offer retrospective discounts based on sales throughout the year and even though the discount isn't physically "paid" until after our year end (and final sales have been calculated), it is accrued within the year's accounts, since it relates to that year's transactions.