11.8 Vouchers, Discounts, and Coupons
Some of the more common scenarios in which an entity may provide
options to purchase additional goods or services involve options in the form of
vouchers, discounts, and coupons. The Codification example and sections below
discuss how entities would apply the revenue standard’s guidance on optional
purchases in those scenarios.
ASC 606-10
Example 49 — Option That Provides the
Customer With a Material Right (Discount Voucher)
55-336 An entity enters into a
contract for the sale of Product A for $100. As part of the
contract, the entity gives the customer a 40 percent
discount voucher for any future purchases up to $100 in the
next 30 days. The entity intends to offer a 10 percent
discount on all sales during the next 30 days as part of a
seasonal promotion. The 10 percent discount cannot be used
in addition to the 40 percent discount voucher.
55-337 Because all customers will
receive a 10 percent discount on purchases during the next
30 days, the only discount that provides the customer with a
material right is the discount that is incremental to that
10 percent (that is, the additional 30 percent discount).
The entity accounts for the promise to provide the
incremental discount as a performance obligation in the
contract for the sale of Product A.
55-338 To estimate the standalone
selling price of the discount voucher in accordance with
paragraph 606-10-55-44, the entity estimates an 80 percent
likelihood that a customer will redeem the voucher and that
a customer will, on average, purchase $50 of additional
products. Consequently, the entity’s estimated standalone
selling price of the discount voucher is $12 ($50 average
purchase price of additional products × 30 percent
incremental discount × 80 percent likelihood of exercising
the option). The standalone selling prices of Product A and
the discount voucher and the resulting allocation of the
$100 transaction price are as follows:
55-339 The entity allocates $89 to
Product A and recognizes revenue for Product A when control
transfers. The entity allocates $11 to the discount voucher
and recognizes revenue for the voucher when the customer
redeems it for goods or services or when it expires.
11.8.1 Options to Purchase Goods at a Discount — Vouchers Available With or Without the Requirement to Make an Initial Purchase
The example below illustrates how the accounting for the use of a voucher that
provides a customer with a discount could vary depending on whether the customer
is required to make a purchase before receiving the voucher.
Example 11-5
In an effort to increase sales,
Supermarket B offers two separate marketing programs to
its customers:
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Program 1 — All visitors to B, irrespective of whether they make any other purchases, can pick up a voucher entitling them to a reduction of $1 from the usual $10 selling price of Product X.
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Program 2 — Customers who purchase Product W for its normal selling price of $7 will receive a voucher entitling them to a reduction of $5 from Product X’s selling price.
Only one voucher can be used for any
purchase of Product X. It has been determined that the
option granted to purchasers of Product W to purchase
Product X for $5 instead of $9 (i.e., the purchase price
when the $1 voucher is redeemed) gives those customers a
material right.
The $1 vouchers issued under Program 1
are not within the scope of ASC 606. Because the
customer does not enter into any enforceable commitment
by picking up a $1 voucher, no contract arises from the
$1 vouchers.
As a result, B should simply treat the
$1 vouchers as a price reduction when customers use the
$1 vouchers to purchase Product X. Therefore, if a
customer uses a $1 voucher to purchase Product X for $9,
the revenue recognized will be $9 since this is the
consideration to which B is entitled in exchange for
Product X (when the $1 vouchers are taken into
account).
However, the $5 voucher issued under
Program 2 is within the scope of ASC 606 because
customers are entitled to the $5 vouchers as part of a
sales transaction (i.e., the contract to purchase
Product W).
Therefore, in accounting for the $5
vouchers, B should consider the guidance in ASC
606-10-55-41 through 55-45 on customer options for
additional goods or services. According to this
guidance, because the option gives the customer a
material right that it would not receive without
entering into the contract, a separate performance
obligation is established.
ASC 606-10-55-44 specifies that entities
should measure this obligation, if it is not directly
observable, by applying an estimate that reflects “the
discount that the customer would obtain when exercising
the option, adjusted for both of the following:
- Any discount that the customer could receive without exercising the option
- The likelihood that the option will be exercised.”
In assessing the stand-alone selling
price of the $5 vouchers, B should consider (1) that
customers not making a purchase could still have claimed
a $1 voucher (i.e., the incremental value of the $5
voucher to the customer would therefore be $4) and (2)
the likelihood that the $5 voucher will be redeemed.
Accordingly, the stand-alone selling
price of the $5 vouchers that will be used to allocate
the transaction price to the performance obligation for
the discount voucher will not exceed the additional
discount of $4, and it may be lower depending on the
proportion of vouchers expected to be redeemed. The
entity recognizes revenue related to the $5 vouchers
when Product X is transferred to a customer, taking into
account the guidance in ASC 606-10-55-46 through 55-49
(discussed in Section
6.4.2.3) on vouchers not expected to be
redeemed.
11.8.2 Stand-Alone Selling Price for Gift Cards That Can Be Purchased Individually or in Combination With Other Goods or Services
The example below illustrates how the stand-alone selling price for gift cards
could vary depending on whether the gift cards are purchased individually or are
bundled with other goods or services.
Example 11-6
Entity T gives away a $10 gift card to
customers if they purchase a particular brand of
headphones. These gift cards are also sold on a
stand-alone basis at face value. Regardless of whether
they are given away or sold, these gift cards are only
redeemable against future music downloads made by
customers from T’s Web site to the value of $10.
Entity T has consistent historical
experience as follows:
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When sold on a stand-alone basis, the gift cards have a 95 percent redemption rate.
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When given away to customers who purchase headphones, the gift cards have a 40 percent redemption rate.
Entity T has determined that the gift
cards given to the customers who purchase headphones
provide those customers with a material right.
Accordingly, they give rise to a performance obligation
under the contract to sell the headphones to which part
of the transaction price should be allocated (see ASC
606-10-55-41 through 55-45 for details).
In allocating the transaction price for
purchases of headphones that include a gift card, T
should use a stand-alone selling price for the gift card
that is different from the cash price charged to
customers buying only a gift card. As discussed in
Section 7.3.3.4, different stand-alone
selling prices can arise for the same item when the
sales are in dissimilar circumstances or to dissimilar
customers.
In the scenarios described above, the
circumstances of the purchase of the gift cards can be
seen to be dissimilar. In particular, customers who
purchase the bundle are receiving gift cards regardless
of whether they want the cards, in contrast with
customers who make a conscious decision to purchase a
gift card; and these different circumstances are
reflected in the markedly different redemption
rates.
Accordingly, the stand-alone selling
price of a gift card given away with headphones is not
directly observable; it cannot be assumed to be the same
as the price of a gift card purchased in isolation
because the sales occur in dissimilar circumstances.
When a stand-alone selling price is not directly
observable, it should be estimated in accordance with
ASC 606-10-55-44, with that estimate reflecting both the
discount that the customer will receive on exercising
the option ($10 in the circumstances described above)
and the likelihood that the option will be
exercised.
Consequently, in the circumstances under
consideration and under the assumption that a customer
could not receive any other discount on downloading
music from T (which would also be reflected in the
estimate required by ASC 606-10-55-44), the stand-alone
selling price of a gift card purchased together with a
set of headphones might be assessed as $4 (40 percent of
$10).
11.8.3 Retailer-Sponsored Coupons Provided Immediately After a Purchase Transaction
Retail stores sometimes provide retailer-sponsored coupons to
customers immediately after a customer transaction (sometimes referred to as
“Catalina” coupons). These coupons are printed at the register on the basis of
an automated program and handed to the customer after a purchase is completed.
An automated program connected to the register determines whether to provide
targeted coupons to the customer as a result of various factors, such as items
purchased by the customer or the amount spent. The coupons given to the customer
can be used only in future purchases, often of specified products.
Sometimes, a customer may be capable of knowing in advance that
he or she will be entitled to receive a particular coupon upon making a
purchase. For example, a retailer may have advertised that it is running a
price-matching campaign under which a customer will receive a coupon that
represents the difference between the price paid for the goods purchased and the
price that would have been paid for those same goods if bought from a
competitor. This coupon can then be redeemed against future purchases the
customer makes from the retailer.
Often, however, when a customer makes a purchase, he or she may
have little or no expectation of either receiving a coupon from the retailer or
being able to obtain particular goods by using such a coupon.
In accordance with ASC 606-10-55-42, the coupon would give rise
to a performance obligation only if it provides a material right that the
customer would not receive without entering into the transaction. This implies
that the discount on the future good or service typically should be part of the
negotiated exchange under the existing contract with the customer. To determine
whether the offer is part of the negotiated exchange under the existing
contract, the retailer would look to ASC 606-10-25-16, which states, in part:
[T]he promised goods and services identified in a contract
with a customer may not be limited to the goods or services that are
explicitly stated in that contract. This is because a contract with a
customer also may include promises that are implied by an entity’s customary
business practices, published policies, or specific statements if, at the
time of entering into the contract, those promises create a reasonable
expectation of the customer that the entity will transfer a good or service
to the customer.
An entity will therefore need to use judgment under the
particular facts and circumstances to ascertain whether it has made a promise
(e.g., through advertising campaigns or its customary business practices) that
has created a reasonable expectation on the part of a customer that he or she
will receive a particular coupon upon making a purchase. An entity may also wish
to consider the historical data on how many customers use the coupon for
discounts on future purchases as part of its assessment of whether the coupon
has a significant value to the customer and might therefore provide a material
right.
In the price-matching campaign example described above, it is
possible that the coupon to be redeemed against future purchases may give rise
to a material right as part of the initial sale (see ASC 606-10-55-42 and 55-43
and Section 11.2
for guidance on making this determination) if the price-matching campaign has
created a valid expectation on the part of the customer that he or she will
receive a coupon for any excess amount paid as part of the current
transaction.
However, if the customer has little or no expectation regarding
any coupons that he or she might receive from the retailer, it is unlikely that
a material right exists as part of the initial sale. In particular, the
possibility that the customer will receive a coupon for a discount on future
purchases when making a purchase is unlikely to have influenced the customer’s
buying decision to any meaningful extent. In such cases, the coupon is instead
similar to a targeted coupon distribution based on customer purchasing habits.
Such a coupon should be accounted for at the time of redemption in accordance
with ASC 606-10-32-27, which states:
[I]f consideration
payable to a customer is accounted for as a reduction of the transaction
price, an entity shall recognize the reduction of revenue when (or as) the
later of either of the following events occurs:
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The entity recognizes revenue for the transfer of the related goods or services to the customer.
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The entity pays or promises to pay the consideration (even if the payment is conditional on a future event). That promise might be implied by the entity’s customary business practices.