IFRS 15 for the retail industry – Volume Discounts & Profit margin guarantees

30 May 2018

Volume discounts

To entice customers to buy/order more goods, it is not uncommon for wholesalers to provide customers with volume discounts/rebates. Under IFRS 15, volume discounts/rebates is a type of variable consideration. Wholesalers are to record revenue at the amount it expects to receive (net of discounts/rebates).  This means that wholesalers will recognise revenue at the average expected price per unit – by estimating the total expected sales volume and the total sales expected revenue (after deducting discount/rebates).

Example – Volume discounts


On 1 June 2019, Tissues Co signed a one year contract with Retailer X to supply boxed tissues for the following prices:

Price per box of tissue Sales volume
$10 0-100,000 boxes
$9 100,001–200,000 boxes
$8 200,001 boxes

Based on past experience, Tissue Co estimates total sales volume will be 150,000 boxes of tissues per annum.

As at 30 June 2019, Tissues Co has sold 30,000 boxes of tissues. How much revenue does Tissues Co recognise?


$10 per box X 100,000 boxes $1,000,000
$9 per box X 50,000 boxes $450,000
Total consideration $1,450,000
Estimated total volume 150,000 boxes
Average price per box $9.67 ($1,450,000/150,000)

The average transaction price therefore is $9.67 per box of tissues.

The journal entry to record sales of 30,000 boxes of tissues is:

DR Cash (30,000 x $10) $300,000  
CR Revenue (30,000 x $9.67)   $290,100
CR Contract liability   $9,900

Note: The contract liability will reverse when sales >100,000 boxes and the amount billed is $9.

  IAS 18 IFRS  15
Sales revenue $300,000 $290,100
Contract liability - $9,900

Practical implications on systems and processes

Some of the practical implications on systems and processes for Tissue Co include:

  • Estimating the expected sales volumes
  • Estimating the average selling price
  • Systems to recognise a contract liability
  • Systems to release the contract liability.

Profit margin guarantees

It is not uncommon for wholesalers to provide retailers with a profit margin guarantee to compensate the retailer for any price mark-down promotions to boost sales volumes. Profit margin guarantees will see wholesalers refunding retailers a portion of the sales revenue if the retailer has not met its minimum sales margin. Under IFRS 15, these guarantees are considered to be a form of variable consideration. This means that if the wholesaler expects that a portion of the sales amount will be refunded back to its customer, the wholesaler would be recognising revenue at an amount less than the selling price.

Example – Profit margin guarantees


As at reporting date, JC Shoe Co sold shoes to Retailer M&S for $2,000,000.

JC Shoe Co refunds a portion of its sales at the end of each season if Retailer M&S has not met its minimum sales margin.

Based on past experience, JC Shoe Co refunds on average approximately 15% of the invoiced amount.

How much revenue should JC Shoe Co recognise?

JC Shoe Co should recognise revenue of $1,700,000 ($2,000,000–($2,000,000x15%)).

The journal entry is:

DR Cash $2,000,000  
CR Revenue   $1,700,000
CR Contract liability   $300,000
  IAS 18 IFRS  15
Sales revenue $2,000,000 $1,700,000
Contract liability Not specifically addressed.
Divergence in practice - some
entities would recognise a
liability of $300,000

Practical implications

Some of the practical implications on systems and processes for JC Shoes Co include:

  • Decreases revenue recognition
  • Systems and processes to estimate the expected amount to be refunded back
  • Systems and processes to recognise a liability account.