2. PREMIUM LIABILITY
• Premiums are articles of value such as toys, dishes, silverware
and other goods given to customers as result of past sales or
sales promotion activities.
• In order to stimulate the sale of their products, entities offer
premiums to customers in return for product labels, box tops,
wrappers and coupons.
• Accordingly, when the merchandise in sold, an accounting
liability for the future distribution of the premium arise and
should be given accounting recognition.
3. PREMIUM LIABILITY
• When the premiums are purchased:
Premiums xx
Cash xx
• When the premiums are distributed to customers:
Premium expense xx
Premiums xx
• At the end of the year, if premiums are still outstanding
Premium expense xx
Estimated premium liability xx
4. Illustration:
An entity manufactures a certain product and
sells it at P300 per unit.
A soup bowl is offered to customers on the
return of 5 wrappers plus a remittance of P10.
The bowl costs P50, and it is estimated that
60% of the wrappers will be redeemed.
The data for the first year on the premium plan
Sales, 10,000 units at P300 each 3,000,000
Soup bowls purchased,
2,000 units at P50 each 100,000
Wrappers redeemed 4,000
4,000 wrappers / 5 = 800 bowls distributed
ADJUSTMENT
Wrappers to be redeemed 6,000
Less: Wrappers redeemed 4,000
Balance 2,000
Premiums to be distributed (2,000 /5) 400
Estimated liability (400 x 40) 16,000
DATE DEBIT CREDITACCOUNT TITLE & EXPLANATION
To record sales
1 Cash 3,000,000
Sales 3,000,000
To record purchase of the premiums
2 Premiums – Soup Bowls 100,000
Cash 100,000
To record redemption of 4,000 wrappers
3 Cash 8,000800 * P10
Premiums – Soup Bowls 40,000800 * P50
Premium Expense 32,000800 * P40
To record the liability for the
premiums at the end of the year
4 Premiums Expense 16,000
Estimated Premium Liability 16,000
60% * 10,000
5. Financial Statement Classification
• At the end of the year, the accounts related to the premium plan are
classified as follows:
• Current Assets:
Premiums – Soup Bowls 60,000
• Current Liabilities:
Estimated Premium Liability 16,000
• Distribution Cost:
Premium Expense 48,000
6. Cash Rebate Program
• A variation of a premium offer is a cash rebate program.
• Cash register receipts, bar codes, rebate coupons and other
proof of purchase often can be mailed to the manufacturer for
cash rebate.
• Purpose: to stimulate sales.
• Accordingly, the estimated amount of the cash rebate should be
recognized both as an expense and an estimated liability in the
period of sale.
7. Illustration:
• An entity offered P500 cash
rebate on a particular model of
TV set. The customers must
present a rebate coupon
enclosed in every package sold
plus the official receipt.
• Past experience indicates that
40% of the coupons will be
redeemed.
• During the current year, the
entity sold 4,000 TV sets and
total payments to customers
amounted to P450,000.
DATE DEBIT CREDITACCOUNT TITLE & EXPLANATION
To recognize cash rebate program
1 Rebate Expense
Estimated Rebate Liability
Rebate Coupons Issued 4,000
Expected to be redeemed 40%
Coupons rebates to be redeemed 1,600
Cash rebate per coupon P500
800,000
Estimated Rebate Liability 800,000
800,000
To record payments to customers
2 Estimated Rebate Liability 450,000
Cash 450,000
8. Cash Discount Coupon
• Another variation of the premium offer is the cash discount coupon
program.
• The cash discount coupon program is a popular marketing tool for the
purpose of stimulating sales.
• Like a premium offer and cash rebate program, an expense and an
estimated liability for the expected cash discount should be
recognized in the period of sale.
9. Illustration:
• During the current year, an entity
inserted in each package sold a
coupon offering P300 off the
purchase price of a particular
brand of product when the
coupon is presented to retailers.
• The retailers are reimbursed for
the face amount of coupons plus
10% for handling.
• Previous experience indicates that
30% of coupons will be redeemed.
• During the current year, the entity
issued coupons with
face amount of P5,000,000 and
total payments to retailers
amounted to P1,100,000.
DATE DEBIT CREDITACCOUNT TITLE & EXPLANATION
To recognize cash discount
coupon offer
1 Cash Discount Coupon Expense
Estimated Coupon Liability
Face Amount of Coupons to be redeemed
5,000,000 * 30% 1,500,000
Multiply by 110%
1,650,000
Total Coupon Liability 1,650,000
1,650,000
To record payments to retailers
2 Estimated Coupon Liability 1,100,000
Cash 1,100,000
( 100% FACE + 10% Handling )
EXPENSE
Basis of estimate
10. Customer Loyalty Program – IFRS 15
• use to build brand loyalty, retain their valuable customers and of
course increase sales volume.
• designed to reward customers for past purchases and to provide
them with incentives to make further purchases.
• If a customer buys goods or services, the entity grants the customer
award credits often described as “points”.
• The entity can redeem the “points” by distributing to the customer
free or discounted goods or services.
• Customers may be required to accumulate a specified minimum
number of award credits or “points” before they can be redeemed.
11. Measurement – customer loyalty program
• An entity shall account for the award credits as a “separate
component of the initial sale transaction”.
• In other words, the granting of award credits is effectively accounted
for as a “future delivery of goods or services”.
• IFRS 15, paragraph 74, provides that an entity shall allocate the
transaction price to each performance obligation identified in a
contract on a relative stand-alone selling price basis.
• The fair value of the consideration received with respect to the initial
sale shall be allocated between the award credits and the sale based
on relative stand-alone selling price.
• The stand-alone selling price is the price at which an entity would sell a
promised good or service separately to a customer.
12. Recognition – customer loyalty program
• The consideration allocated to the award credits is
• initially recognized as deferred revenue and
• subsequently recognized as revenue when the award credits are
redeemed.
• The amount of revenue recognized shall be based on the number of award
credits that have been redeemed relative to the total number expected to
be redeemed.
• The estimated redemption rate is assessed each period. Changes in the
total number expected to be redeemed do not affect the total
consideration for the award credits.
• Instead, the changes in the total number of award credits expected to be
redeemed shall be reflected in the amount of revenue recognized in the
current and future periods.
• the calculation of the revenue to be recognized in any one period is
made on a “cumulative basis” in order to reflect the changes in
estimate.
13. Illustration – IFRS 15
• An entity, a grocery retailer, operates a
customer loyalty program.
• The entity grants program members
loyalty points when they spend a specified
amount on groceries.
• Program members can redeem the points
for further groceries. The points have no
expiry date.
• The sales during 2019 amounted to
P9,000,000 based on stand-alone selling
price.
• During 2019, the customers earned 10,000
points.
• But management expects that 80% or
8,000 of these points will be redeemed.
• The stand-alone selling price of each
loyalty point is estimated at P100.
DATE DEBIT CREDITACCOUNT TITLE & EXPLANATION
To record initial sale
1 Cash
Product Sales 9,000,000
1,000,000
Points – stand-alone selling price
8,100,000
Total 10,000,000
9,000,000
( 10,000 * P100 )
ALLOCATION of TRANSACTION PRICE
Product Sales (9/10 * 9,000,000) P8,100,000
Points (1/10 * 9,000,000) 900,000
Total Transaction Price P9,000,000
900,000
Sales
Unearned Revenue - points
14. Illustration – IFRS 15
• During 2019, the customers
earned 10,000 points.
• But management expects that
80% or 8,000 of these points
will be redeemed.
• The stand-alone selling price of
each loyalty point is estimated
at P100.
• On December 31, 2019, 4,000
points have been redeemed in
exchange for groceries.
DATE DEBIT CREDITACCOUNT TITLE & EXPLANATION
To record initial sale
1 Cash
Sales
Unearned Revenue Points
8,100,000
9,000,000
(4,000/8,000) * 900,000
450,000
900,000
To recognize revenue in 2019
from points redeemed
Dec 31 Unearned Revenue Points
Sales
450,000
Points Redeemed in 2019 4,000
Divide by expected points to be redeemed 8,000
Multiply by Unearned Revenue 900,000
15. Illustration – IFRS 15
• In 2020, the management
revised expectations and now
expects that 90% or 9,000
points will be redeemed
altogether.
• During 2020, the entity
redeemed 4,100 points.
• In 2021, a further 900 points
are redeemed.
• Management continues to
expect that only 9,000 points
will ever be redeemed,
meaning, no more points will
be redeemed after 2021.
DATE DEBIT CREDITACCOUNT TITLE & EXPLANATION
360,000
To recognize revenue in 2020
from points redeemed
Dec 31 Unearned Revenue Points
Sales
360,000
Points Redeemed in 2019 4,000
Points Redeemed in 2020 4,100
Total Points Redeemed on Dec 31, 2020 8,100
810,000
Cumulative Revenue – Dec 31,2020
Revenue recognized during 2019 450,000
( 8,100/9,000) * P900,000
Revenue to be recognized during 2020 360,000
90,000
To recognize revenue in 2021
from points redeemed
2021
Dec 31 Unearned Revenue Points
Sales
90,000
16. Third party operates loyalty program
• An entity, a retailer of electrical goods, participates in a customer
loyalty program operated by an airline.
• The entity grants program members one air travel point for every
P1,000 spent on electrical goods.
• Program members can redeem the points for travel with the airline
subject to availability. The entity pays the airline P60 for each point.
• During the current year, the entity sold electrical goods for
consideration totalling P4,500,000 based on stand-alone selling price
and granted 5,000 points with stand-alone selling price of P100 per
point.
17. Stand-Alone
Selling Price Allocation
Product sales 4,500,000
Points (5,000 x 100) 500,000 ,
5,000,000 4,500,000
Revenue from points 450,000
Payment to airline (5,000 x 60) (300,000)
Net revenue from points 150,000
• The entity has fulfilled its
obligation by granting the
points.
• Therefore, revenue from points
is recognized when the
electrical goods are sold.
4,050,000
450,000
• To record the initial sale
Cash 4,500,000
Sales 4,050,000
Revenue from Points 450,000
• To record payment to airline
Loyalty program expense 300,000
Cash 300,000
18. Customer Loyalty Program
• Ember Company, operates a customer
loyalty program. The entity grants loyalty
points for goods purchased.
• The loyalty points can be used by the
customers in exchange for goods of the
entity. The points have no expiry date.
• During 2020, the entity issued 50,000
awards credits and expects that 75% shall
be redeemed. The stand alone selling
price of the award credits is reliably
measured at P1,200,000.
• In 2020, the entity sold goods to
customers for a total consideration of
P6,000,000 based on stand-alone selling
price.
DATE DEBIT CREDITACCOUNT TITLE & EXPLANATION
To record initial sale
1 Cash
Product Sales 6,000,000
1,200,000
Points – stand-alone selling price
5,000,000
Total 7,200,000
6,000,000
ALLOCATION of TRANSACTION PRICE
Product Sales (6/7.2 * 6,000,000) P5,000,000
Points (1.2/7.2 * 6,000,000) 1,000,000
Total Transaction Price P6,000,000
1,000,000
Sales
Unearned Revenue - points
19. Customer Loyalty Program• Ember Company, operates a customer loyalty
program. The entity grants loyalty points for
goods purchased.
• The award credits redeemed and the total
award credits expected to be redeemed
each year are as follows:
YEAR REDEEMED EXPECTED
2020 15,000 75%
2021 6,000 80%
2022 9,000 80%
2023 12,750 90%
2020 2021 2022 2023
Total Awards Credits (points) 50,000 50,000 50,000 50,000
Multiply by % Redeemable 75% 80% 80% 90%
Multiply by Unearned Revenue 1,000,000 1,000,000 1,000,000 1,000,000
Cumulative Revenue on Points
Revenue on Points - CUR. YR
CUMULATIVE BASIS - Computation
Estimated Redemption 37,500 40,000 40,000 45,000
Divide from Redeemed Points 15,000
Percentage of Redemption 40%
400,000
CUM. REV from PREV. YR. 0
400,000
21,000 30,000 42,750
52.5% 75% 95%
525,000
400,000
125,000
750,000
525,000
225,000
950,000
750,000
200,000
20. Customer Loyalty Program
• Ember Company, operates a customer
loyalty program. The entity grants loyalty
points for goods purchased.
• The loyalty points can be used by the
customers in exchange for goods of the
entity. The points have no expiry date.
• During 2020, the entity issued 50,000
awards credits and expects that 75% shall
be redeemed. In 2020, the entity sold
goods to customers for a total
consideration of P6,000,000 based on
stand-alone selling price.
DATE DEBIT CREDITACCOUNT TITLE & EXPLANATION
400,000
To recognize revenue from points redeemed
Dec 31 Unearned Revenue Points
Sales
400,000
YEAR REDEEMED EXPECTED
2020 15,000 75%
2021 6,000 80%
2022 9,000 80%
2023 12,750 90%
2020
125,000
To recognize revenue from points redeemed
Dec 31 Unearned Revenue Points
Sales
125,000
2021
225,000
To recognize revenue from points redeemed
Dec 31 Unearned Revenue Points
Sales
225,000
2022
200,000
To recognize revenue from points redeemed
Dec 31 Unearned Revenue Points
Sales
200,000
2023
22. Illustration – IFRS 15
• During 2019, the customers
earned 10,000 points.
• But management expects that
80% or 8,000 of these points
will be redeemed.
• The stand-alone selling price of
each loyalty point is estimated
at P100.
• On December 31, 2019, 4,000
points have been redeemed in
exchange for groceries.
DATE DEBIT CREDITACCOUNT TITLE & EXPLANATION
To record initial sale
1 Cash
Sales
Unearned Revenue Points
8,100,000
9,000,000
(4,000/8,000) * 900,000
450,000
900,000
To recognize revenue in 2019
from points redeemed
Dec 31 Unearned Revenue Points
Sales
450,000
Points Redeemed in 2019 4,000
Divide by expected points to be redeemed 8,000
Multiply by Unearned Revenue 900,000
23. Illustration – IFRS 15
• In 2020, the management
revised expectations and now
expects that 90% or 9,000
points will be redeemed
altogether.
• During 2020, the entity
redeemed 4,100 points.
• In 2021, a further 900 points
are redeemed.
• Management continues to
expect that only 9,000 points
will ever be redeemed,
meaning, no more points will
be redeemed after 2021.
DATE DEBIT CREDITACCOUNT TITLE & EXPLANATION
360,000
To recognize revenue in 2020
from points redeemed
Dec 31 Unearned Revenue Points
Sales
360,000
Points Redeemed in 2019 4,000
Points Redeemed in 2020 4,100
Total Points Redeemed on Dec 31, 2020 8,100
810,000
Cumulative Revenue – Dec 31,2020
Revenue recognized during 2019 450,000
( 8,100/9,000) * P900,000
Revenue to be recognized during 2020 360,000
90,000
To recognize revenue in 2021
from points redeemed
2021
Dec 31 Unearned Revenue Points
Sales
90,000
