As we covered here, the IASB recently called for stakeholder feedback to inform its review of the accounting standard for revenue from contracts with customers, IFRS 15.

This is part of the regular post-implementation review process “to assess whether the effects of applying the new requirements on users of financial statements, preparers, auditors and regulators are those the IASB intended when it developed the requirements.” We already looked at some feedback relating to the area of “principal vs. agent.” Based on my unscientific review of the comment letters, the area of consideration payable to a customer came up almost as often: IFRS 15 says an entity accounts for this “as a reduction of the transaction price and, therefore, of revenue unless the payment to the customer is in exchange for a distinct good or service that the customer transfers to the entity.” In explaining the concept, the standard’s basis for conclusions cites wording from US GAAP on the concept of an “identifiable benefit” – a good or service sufficiently separate from the recipient’s purchase of the entity’s products “such that the vendor could have entered into an exchange transaction with a party other than a purchaser of its products or services in order to receive that benefit.” Sometimes though the incentives provided to the customer, whether in cash or some other form, exceed any revenue to be earned from that customer under the current arrangement with no corresponding “identifiable benefit,” perhaps in the hope of drawing the customer back on more lucrative terms in the future, or of attracting further business from other participants in the transaction chain.

The Accounting Standards Board of Japan was among those touching on a relatively common issue in this respect:

• Some auditors noted that IFRS 15 was not necessarily clear on how to account for consideration payable to a customer when it exceeds the amount of consideration expected to be received from the customer. An example included a case where an entity that established a new platform business offered a commission-free period as well as cash incentives to attract new customers to participate in the platform. These auditors observed diversity in practice in the accounting for the cash incentive, including reduction in revenue, recognition of expenses, and recognition of an asset.

ESMA likewise noted: “We have observed an increase in the number of instances where an entity offers significant incentives to drive increased sales, resulting in questions regarding the appropriate classification of ‘negative revenue.’” EY expands:

• … This is a significant issue for some entities (e.g., agents, airlines, platform companies) and is becoming increasingly common. There is diversity in practice, with some entities presenting negative revenue and some reclassifying it, and the basis upon which entities reclassify can vary.
• We believe this could be a candidate for a narrow-scope amendment clarifying whether, and when, reclassification is permitted. We appreciate that to address this topic, guidance would also be needed to address application questions, such as:
  • When determining whether negative revenue exists, whether to consider all (or some) transactions with current customers, past customers, anticipated customers, down or outside the distribution chain, etc., with all (or some) entities within the seller’s consolidated group
  • When determining the amount to reclassify (if any), whether to do so on a transaction-bytransaction, contract-by-contract, or cumulative basis, and, if cumulative, whether that should include all (or some) past and/or anticipated contracts
• We note that there is legacy US GAAP that entities applying ASC 606 often utilise in practice and would encourage the IASB to consider that practice in addressing this issue.

A KPMG handbook, available online, opines that an entity will typically record consideration payable to a customer as a reduction of revenue even when it results in negative revenue, but provides a couple of examples in which reclassification as an expense might be appropriate (even in the absence of any identifiable exchange of a good or service), for example: “A customer relationship is terminated such that it is unlikely that there will be future anticipated contracts, and the payment exceeds cumulative revenue recognized during the customer relationship, possibly because of threatened litigation.” Anyway, if the IASB didn’t say much in IFRS 15 about negative revenue, one imagines it might be because they reasonably didn’t expect the issue to come up that often – unless, that is, it was clear that the issue wasn’t one of “negative revenue” at all, but rather, as indicated, one of bundled transaction streams which more correctly ought to be disentangled and accounted for according to their separate natures. If the issue is indeed a common one, it probably tells us that much of present-day business decision-making is even more convoluted and potentially messed-up than we already knew it to be. Regardless, it wouldn’t be surprising if the IASB provided a little more guidance on the area, although perhaps not as much of it as suggested by EY’s two bullet points above…

The opinions expressed are solely those of the author.