The impact of IFRS 15 on the retail and consumer products industry

SUITS THE C-SUITE By Manolito R. Elle

Business World (01/30/2017 – p.S1/2)

In previous Suits the C-Suite articles, we have provided an overview of the potential impact of the new revenue recognition standard, International Financial Reporting Standards (IFRS) 15, Revenue from Contracts with Customers, on certain industries such as telecommunications and banking. Another industry where the entities may need to change their revenue recognition policies and practices resulting from IFRS 15 is the retail and consumer products industry.

Some of the relevant changes under IFRS 15 that may have a significant impact on the retail and consumer products industry are as follows:


Retail and consumer products entities frequently give customers the option to purchase additional goods or services. These options come in various forms, including sales incentives (such as coupons or vouchers with a limited distribution, competitor price matching programs aimed at select customers, gift certificates issued by a retailer as a promotion), customer award credits under a loyalty or reward program, contract renewal options (like waiver of certain fees or reduced future rates) or other discounts on future goods or services.

Under IFRS 15, when an entity grants a customer the option to acquire additional goods or services, the option is a separate performance obligation if it provides a material right to the customer (e.g., a coupon or voucher that provides a discount that exceeds the range of discounts typically extended for goods or services to that class of customers in a specific geographical area or market). If the entity assesses that the option is a separate performance obligation, such an option will become part of the entity’s revenue transaction and the entity will be required to allocate a portion of the consideration to this option. The purpose of this requirement is to identify and separately account for options that customers are essentially paying for — often implicitly — as part of the sales transaction.

In certain cases, customers do not exercise all their contractual rights under such options. Such unexercised rights are often referred to as “breakage.” A typical example of breakage is when the value of coupons or vouchers is not redeemed or is forfeited. Breakages are covered by specific guidance under IFRS 15. If an entity expects to benefit from the breakage, it should recognize an additional revenue from the breakage consistent with the pattern of rights exercised by the customer (i.e., by comparing the goods or services delivered to date over the goods or services expected to be delivered, net of breakage). Otherwise, the entity should recognize any breakage amount as revenue when the likelihood of customer exercising its remaining rights becomes remote.


Entities in retail and consumer products typically provide rights of return to customers. The rights of return may be contractual, implicit due to customary business practice or a combination of both, such as when an entity has a stated return period, but generally the entity still accepts returns over a longer period.

Under IFRS 15, revenue should not be recognized for goods expected to be returned. A refund liability should instead be recognized, representing the entity’s obligation to return the customer’s consideration. Entities will also recognize a return asset (and adjust cost of sales), in lieu of the usual cost of sales, for the right to recover the goods that the customer will return instead of the usual cost of sales. The new standard provides specific requirements on the measurement of the carrying value of the return asset.

In general, the ultimate amount of estimated returns under the new standard may be consistent with amounts estimated under the current revenue recognition standards. However, entities will still need to assess whether their current models for estimating returns are appropriate under the new standard.


Many entities of consumer products make payments to their customers. Slotting fees, co-operative advertising arrangements, and coupons and rebates are common examples of consideration paid to a customer. Some entities also make payments to the customers of resellers or distributors that purchase directly from them. For example, manufacturers of some consumer products offer coupons to consumers, even though their direct customers are the grocery stores that sell on to end-customers.

To determine the appropriate accounting treatment, an entity must initially assess whether it will receive any good or service in return for such payment (or payable) to the customer or if this is merely an incentive to the customer to purchase more products from the entity. The result of this assessment will have an impact on whether the payment (or payable) to a customer will be recognized as either an asset or expense (if the customer will provide a distinct good or service), a reduction of revenue or a combination of both. Thus, for entities that make such payments to their customers, they must carefully consider the nature of what they get in return as this may impact on the revenues they will recognize in the future.


As retailers enhance their supply chain by integrating online and mobile sales and inventory channels with traditional brick-and-mortar locations to create multiple sales channels (e.g., buy from the retailer’s website/app or in its physical store), they will need to evaluate at what point revenue should be recognized for the sale. Under IFRS 15, revenue is recognized when the customer obtains control over the products or services, which is the ability of the customer to direct the use of and obtain substantially all of the remaining benefits from those goods or services. This is a different approach from the current IFRS which requires that revenue is recognized when there is transfer of risks and rewards to the customer.

Retailers will also need to evaluate whether the contract with the customer includes multiple performance obligations. If more than one performance obligation exists, entities will need to determine the number of performance obligations and when each performance obligation has been satisfied (i.e., when revenue should be recognized).


With IFRS 15 taking effect on Jan. 1 2018, entities in retail and consumer products should immediately start assessing the impact of the new standard on their revenue recognition policies and practices. These include revisiting the revenue streams, existing contracts and other sales-related transactions and assessing the impact of IFRS 15 for each of these transactions. The assessment should consider the impact or required adjustments on the financial statements and balances. In addition, the assessment must look into any change to the accounting processes, IT systems, infrastructure and even internal controls in order for these entities to gather the necessary data and information needed to properly implement the new standard.

Entities should also consider the requirement to disclose the impact of the new standard in their 2016 financial statements in view of the requirement to disclose potential impact of new standards issued but not yet effective.

This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the author and do not necessarily represent the views of SGV & Co.

Manolito R. Elle is a Partner of SGV & Co.