Accounting for Consideration Received from Vendors – ASC 705-20

Vendors offer incentives and allowances to resellers in different forms. These incentives can be in the form of cash or non-cash allowances to their resellers.

ASC 705-20 guides on the accounting treatment for the considerations received from the vendors. Whereas, ASC 606-10-32 guides on the accounting principles of the considerations payable to the customers.

Let us discuss what are considerations received from vendors and their accounting recognition.

Considerations Received from Vendors

Some entities may receive considerations from vendors. These considerations can be in cash or non-cash forms.

The consideration can be for one of the several possible cases. Sometimes, it can be offered as an advertising campaign fee, a product slot, a pricing strategy, a rebate, or any other similar purpose.

An entity should account for these considerations received from vendors separately.

A vendor may receive cash rebates. The accounting standards guides that cash considerations should be accounted for as a reduction in the price of goods by the customer (receiving entity).

Vendors offer incentives, rebates, and allowances to their resellers for several purposes. Most often, the aim is to encourage sales of products. For instance, a common form of considerations received from vendors is the slotting fee that captures prominent product slots in the seller’s store.

A similar approach is to offer marketing or advertising fees to the seller. However, care must be taken to account for such expenses as these services could be offered through a third-party specialist or as an outsourced service by either party.

The receiver should first evaluate the form and substance of the consideration from the vendor. Then, the accounting treatment for the categorized consideration should be accounted for.

Accounting for Consideration Received from Vendors – ASC 705-20

ASC 705-20 guides on the accounting treatment of consideration received from vendors.

First, the cash consideration received from a vendor should be accounted for a reduction in the purchase prices of goods.

The exception to this rule can be in the following circumstances.

ASC 705-20-25-01 states:

  • When the consideration received from the manufacturer is for sales incentives to the customer. These sales incentives can be in the form of rebates or sales coupons to end-buyers.

ASC 705-20-25-03 states:

  • If the consideration is received is for the reimbursement of costs incurred by sellers for the vendor’s products. The consideration received should represent a reduction of these costs and should be specific, incremental, and identifiable.
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ASC 705-20-25-05 states:

  • If the consideration is received in exchange for a distinct good or services transferred to a vendor. Such revenue amounts should be recognized in a similar way as the revenue received from other contracts made with customers.

The entity would evaluate the standalone selling price of a distinct good. If the consideration amount received from the vendor is higher than the standalone selling price, the excess amount should be accounted for as a reduction to the purchase price of goods.

An entity can apply the exception under ASC 705-20-25-01 if all of the following conditions are fulfilled:

  • Consumers can use the incentive at any reseller outlet. It means the discount or rebate should be for all resellers uniformly.
  • The vendor reimburses the reseller directly based on the face value of the incentive.
  • The reseller’s reimbursement time is linked to the customers’ incentive terms.
  • The reseller should be an agent of the vendor for the incentive transaction linking the vendor and the customer.

ASC 705-20-25-05 states that when an entity can fulfill all of the criteria (mentioned above), it should account for the transactions as revenue received from other contracts with customers.

If these conditions do not hold, the considerations received should be accounted for as a reduction to purchase prices of goods.

Let us briefly elaborate on the above-mentioned points.

Vendor Rebates – Cash Considerations

ASC 705-20-25-1 states that cash considerations received from vendors act as reductions in the prices of goods or services. Therefore, such payments should be recorded as a reduction in the cost of goods sold in the financial statement of the receiver unless classified otherwise.

In some cases, vendors offer rebates or discounts if the resellers achieve a certain level of purchases through amount or remain committed for a specified period through sales contracts. Such considerations should be recognized as reductions in the product purchase prices on a systematic and reasonable basis as the customer earns the rebate or refund.

In other situations, the considerations received in cash may also be accounted for a reduction in the price of inventory. The recognition would depend on the level, frequency, and inventory costing method used by the entity as well.

Vendor Incentive Offered to Reseller’s Customers

Incentives offered by vendors to a reseller’s customers should not be accounted for as a reduction in the cost of goods sold. These considerations are accounted for separately by the receiving entity.

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These considerations should be accounted for by the entity as other income or revenue depending on the circumstances. ASC 705-20-25-4 guides on the recognition of these considerations as either revenue or other income as applicable.

Vendor Allowances

When vendors provide allowances to resellers for specific purposes, they should be recognized differently. For example, a vendor may offer an advertising allowance to its resellers to promote the launch of a new product.

Similarly, vendor allowances provided for the construction of a particular asset should be accounted for differently. ASC 705-20 provides guidelines on the accounting treatment of these allowances.

For example, an entity may apply ASC 720-35 to recognize advertising allowances received from vendors as a reduction in advertising costs. Such accounting is recognized only when the cash received from the vendor is identifiable for a specific purpose.

Estimates for Future Considerations

When analyzing incentives and other considerations received from the vendor, an entity can estimate amounts of future rebates and incentives as well.

Some key points regarding estimation difficulties for the future rebates and considerations can include:

  • The incentive or rebates from vendors relate to good purchases that will occur relatively in the longer period.
  • The entity does not possess any historic data for similar accounting or estimates of future rebates.
  • The entity possesses historic data and experience but the circumstances have changed significantly such that the available data cannot be applied for the forecast.
  • The entity’s historic experience requires significant changes and amendments when recording the actual consideration amounts received in the past.
  • The goods sold or products are obsolete to technological changes, changes in consumer demand, or other external market factors.

Considerations Payable to a Customer

A relevant accounting issue to the consideration received from vendors is the accounting for considerations payable to a customer.

The considerations payable to a customer can be in the form of cash, incentives, allowances, rebates, or refunds. The consideration amount can be variable as well such as a percentage of sales on specific items. These variable considerations require professional evaluations to estimate the variable considerations.

ASC 606-10-32-25 guides on the accounting treatment for the considerations payable to customers. The excerpt reads:

“Consideration payable to a customer includes cash amounts that an entity pays, or expects to pay, to a customer (or to other parties that purchase the entity’s goods or services from the customer). The consideration payable to a customer also includes credit or other items (for example, a coupon or voucher) that can be applied against amounts owed to the entity (or to other parties that purchase the entity’s goods or services from the customer). An entity shall account for consideration payable to a customer 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.”

A key aspect for the reporting entity is to consider whether the payable amount can be linked with the revenue contracts made with the customers. Such payments can be linked to revenue contracts even if the timing of the payment does not coincide with a revenue transaction.

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Income Statement Classification of Considerations Payable to Customers

Considerations payable to customers should be recorded as a reduction of the arrangement’s transaction price. Therefore, it reduces the revenue recognized from the agreement with the customer unless the payment is for distinct goods or services.

Any considerations payable for distinct goods or services should be recognized as any other amount payable to customers for supplies.

A reporting entity should use professional judgment to evaluate whether the consideration payable to the customer is for distinct goods or services. For instance, the entity may make a payment for a distinct good purchased if that good is normally sold by that customer.

The reporting entity should also evaluate the fair value of the consideration payable for the distinct goods or services. Any amount excessive of the fair value of goods or services reduces the transaction price for the arrangement as it represents a discount to the customer.

In many cases, the reporting entity can face difficulty in evaluating the fair value of the consideration payable for distinct goods or services. In such cases, the reporting entity should account for all considerations payable to customers as a reduction in the transaction price as a discount to the customers.

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