Chapter 1: Problem: Rationale and Background
Flash sale, or deal-of-the-day, is an ecommerce business model that had risen
popularly in the internet today. Offering potential customers with high discounted
products and services, the said model continually expands up to date, with many
companies trying such tactic to win an easy customer by the hour.
Websites offering a flash sales service let potential customer sign up for an
account for them to buy different deals flashed in the home page. These deals are
online coupons or vouchers that have a high discount rate for a product or service
offered by different companies, often lasting for a maximum number of slots and hours
in which it would be availed.
For the past nine years, flash sales have existed and with different companies
ready to edge out the competition, the said business model will continually grow, having
forecasted to have a customer spending in the US of about $4 billion (Kelsey, 2011).
Within these factors that questions about proper accounting procedures, such as
revenue recognition standards, be raised not just on transacting companies but also to
website companies offering these flash sales services. Being new to the market, the
underlying question goes to the proper revenue reporting standard to be applied in the
said business model and if such standard is being observed uniformly by companies
Furthermore, it is also of question as to the transparency of each transaction and
revenue recognized, having high discount rates offered by companies and having
different cost that goes along with the transactions. The credibility of each transaction is
the put to the test.
Research Question
This study was conducted for the purpose of determining what accounting
procedure and what accounting standards are being used by the companies involved
during the period of research. Specifically, the study attempted to answer the following
On the transacting companies:
1. How does each company make their journal entries on the following
a. When payment is made online via credit card and/or other modes
of payment;
b. When customer redeems the vouchers;
c. When the vouchers are not redeemed/expires?
2. How does each company account for discounts and related cost to sell?
3. What specific accounting procedure and standard does each company
use in their transactions?
On the host company:
1. How does each company make their journal entries on the following
a. When payment is made online via credit card and/or other modes of
b. When customer redeems the vouchers;
c. When the vouchers are not redeemed/expires?
2. Does the host company own these vouchers or are these vouchers property
of different companies and are only goods on consignment?
3. Are there standards on choosing the transacting company?
4. In what sector is flash sale more profitable as observed in the transactions
with the website?
5. Is the host company the one to decide on what discount rate is to be applied
on the offered products and/or services? If so, what factors does the host
company consider in deciding on such discount rate?
Theoretical Framework
IFRS has some provisions regarding promotional ventures by a company to
generate customers, such as loyalty programs, premiums and coupons, and gift
certificate. However, these standards do not define, in its entirety, the proper accounting
procedures done on flash sales transactions; flash sales transactions, being viewed as
a combination of these standards.
Specifically, IAS 37 provides a thorough guide on how to account for provisions
for premiums and coupons. IFRIC 13, on the other hand, governs the transactions
regarding customer loyalty programs such as point-system award. Lastly, IAS 18 covers
the general revenue recognizing standard; in this standard, companies are guided as to
when revenue may be recognize or when should it be deferred.

FIG 1.1 General decision tree for IAS 37, accounting for provisions, contingent
liabilities, and contingent assets.
IAS 37 illustrates a typical marketing system in which companies offer
redeemable items in exchange for a certain sum and/or for labels, crowns, and/or
coupons. In here, sales transactions are accounted normally. A new inventory account
is established for recording the redeemable items purchased and distributed. Premium
Expense is recognized once the said items are redeemed or when estimated.
IFRIC 13, in its basic sense, discusses how companies should treat loyalty
awarding system. In such case when a company decides to reward its customer by
giving certain amount of points, redeemable as form of a purchasing instrument, the
company is required to establish a liability account for Customer Loyalty Awards.

FIG 1.4 General measurements of revenues according to IAS 18.
IAS 18 shows the basic revenue recognition standard. This standard basically
shows the accrual and/or deferral of revenue.

FIG 1.5 The basic flash sales relationship.
The researchers, now, would want to have a comparative analysis of the
standards used by companies practicing flash sale, and would want to cover the
appropriateness of IFRS based standards on flash sales. As mentioned before, these
IFRS based standards are limited to a certain nature of transactions. Flash sales, being
new to the market, would test the effectiveness of said standards—whether they are
sufficient to cover the transactions present on the said sales or there is a need to
develop a new reporting standard more appropriate to use on such transactions.
Though IFRS covers accounting for these types of transactions, the inherent limitation
to it is in the nature of these incentive programs. IFRS based standards focuses on
certain types of transactions

Conceptual Framework

The host website company makes collaboration with businesses to offer
vouchers for the products/ services at a set discounted price. The customers can
purchase the vouchers by visiting the host website company and make a payment via
online credit card or other modes of payment. When the customers purchase the
vouchers, the host website company, credit card company and the business which
makes the products or services will receive the price according to their agreement. The
accounting procedures must be followed in accordance with the IFRS, specifically the
IAS 37 which provides a thorough guide on how to account for provisions for premiums
and coupons.

Company that
sells product
or services

Host website

Host website
Company that
sells product
or services
redeem the
via credit card or other modes of
Significance of the Study
The researchers consider this study beneficial, not only to themselves, but also
to different companies that are affected by flash sales through assisting them what
proper accounting procedure to apply in different transactions covered by flash sales.
This may help them have a better judgment on reporting properly the different accounts
affected by each transaction, especially revenue-related accounts.
The researchers also believe that this study is significant for companies hosting
flash sales website. This may guide them in assessing each transaction faced by their
website and how transparently they may report revenue for different stakeholders.
This research may also be of interest by people in the Board of Accountancy
(BOA). This research may help them analyze existing accounting standards and let
them deem whether to create or modify existing standards for the fitting of flash sales
This research is also may also be valued by those in the academe and the rest of
the student body. This research seeks to sustain critical thinking on students and
professors. This research hopes to generate opinions on both students and professors
regarding transactions on flash sales.
Mostly, this study would be beneficial for the development of the researchers as
they gain more knowledge and expertise on the said issue.
Scope and Limitations
The research focuses on selected companies that use flash sales as a marketing
strategy and selected companies that host flash sales.
Furthermore, the study is only a comparative study about accounting procedures
and accounting standards used by these companies. This study only seeks whether
companies use a uniform standard as to the accounting of transactions, and if so, the
study also seeks the said standard that is applied on those transactions.
The research focuses only on the revenue recognition aspect and related aspect
of each transaction. The study does not cover other accounting matter such as
inventory accounting.
Though the research seeks a uniform standard to be applied on transactions
done in flash sales, especially revenue recognition standard, it does not aim to suggest
a specific standard on the said matter, considering the age of this business model in the
country and further developments in accounting procedures.
1. Both the transacting companies and host websites are using IFRS based
standard in accounting for revenues under flash sales transactions.
2. Both transacting companies and host websites are not using IFRS based
standards in accounting for revenues under flash sales transactions but use a
common standard adopted from other GAAP.
3. In its absence in the local standards, there is no uniformity as to the standard
being applied by each company on flash sales transactions.
1. Companies may adopt other standards in the absence of such standard in the
2. Companies are not limited as to the adoption of US GAAP and may adopt other
3. There is an inherent limitation as to the use of IFRIC 13 on the transactions done
on incentive programs.
Definition of Terms
1. Flash sales: an online marketing activity that uses social media to transform
discounted ecommerce promotions into social buying experiences (Boon, Wiid,
&DesAutels, 2012).
2. IAS 37: It sets out the accounting and disclosure requirements for provisions,
contingent liabilities and contingent assets, with several exceptions (IFRS, 1999).
3. IFRIC 13: addresses accounting by entities that grant loyalty award credits (such
as 'points' or travel miles) to customers who buy other goods or services.
Specifically, it explains how such entities should account for their obligations to
provide free or discounted goods or services ('awards') to customers who
redeem award credits (IFRS, 2008).
4. IAS 18: outlines the accounting requirements for when to recognize revenue
from the sale of goods, rendering of services, and for interest, royalties and
dividends. Revenue is measured at the fair value of the consideration received or
receivable and recognized when prescribed conditions are met, which depend on
the nature of the revenue (IFRS, 1993).

Chapter 2: Review of Related Literature
This section shows a summary of previously published research materials
relevant to the subject. Information gathered from different published articles and
essays that are found here are needed by the researchers in order to have a better
understanding on the subject and the issue at hand.

FIG 2.1 A business model of a sample flash sale host company, Groupon.
Flash sale involves discounted offers to customers browsing a specific website
that hosts a flash sale. The revenue generated from these transactions are then shared
by the host website and the company that offered the product or service (Vendemia,
Kos, & Eunni, 2013). These host websites partner with different companies, offering
discounts on different products and services from 50%-90% (Boon, Wiid, &DesAutels,
2012). The basic model of flash sale is to combine daily coupons, local marketing, and
group buying (Vendemia, Kos, & Eunni, 2013).
Flash sale transactions include three parties, all of which are trying to earn a gain
from the said transaction. These parties are the host website, the transacting company,
and the customer. In this kind of set up, the transacting company becomes the
middleman and has the probability of incurring a loss for every transaction (Vendemia,
Kos, & Eunni 2013).

FIG 2.2 Groupon‟s revenue model.
For every transaction the host website makes with the customer, often times,
both the website and the company owning the goods and services records revenue. In a
traditional sense, most companies find a promotional company for their products to be
endorsed, more often than not, allowing such promotional company to sell products with
vouchers/coupons attached to such product that has a discount rate for the next
purchase. This, thus, create a record on the transacting company about the gross sale,
the considerations present in the transactions, and discounts that were applied in the
transactions while having the promotional company the record of different promotional
expenditure it exhausted (Sales & Use Tax Alert, 2012).
Though, primarily, accounting is concerned only to both parties, the host
company and the transacting company, the pricing and discounting decisions of both
parties are affected by customer sensitivity and perception on such promotions.
Customers using these coupons tend to be generally price-sensitive, and so the servers
must be prepared for low tips. In cases wherein such promotions are ineffective to
generate profitability, a company who has a low marginal cost on promoted items may
still have a beneficial effect as a result of flash sale transactions (Vendemia, Kos, &
Eunni, 2013).
As asserted by Vendamia, Kos, & Eunni:
“These discounted offers are advertised on a daily deal website, and the revenue
generated from the sale of the coupons is shared with the website owner. In most cases
there is a minimum sales threshold, failing which the deal is nullified, and the money
refunded to the customer. This ensures that the vendor turns in a profit by selling a
certain minimum volume of coupons and the customer saves money from the coupon
discount, while the daily deal website profits from the coupon revenues. This win-win
situation for all parties involved in the 3-way commercial transaction has led to
phenomenal popularity of daily deal websites in recent years. The participating
merchants typically use daily deal offers as a form of marketing, hoping to attract new
customers and convert them to regulars. Unfortunately, this rarely occurs. Therefore,
merchants should not routinely assume that consumers who use the coupon will return
to purchase the item or service at full price.”
With the boom of flash sales, customers find ways on how to have the „bigger‟
gain among the three. Subramanian asserted that customers strategically delay buying
decision to observe the progress of the coupon; elaborating the essence of the time
given to each coupon. With this risk at hand on transacting companies, Subramanian
further discussed on how transacting companies and host websites should set a
minimum limit on each coupons, considering the profitability of the foreseen
In a slight opposite view of Parsons, Ballantine, Ali, & Grey, discount has a
negative impact on products that are being sold in the market. They asserted that a
product or service having a high discount rate may have a defective quality or such
brand is not trustworthy enough.
But, instilling a positive outlook, Vendamia, et al. echoed Jacobs‟ opinion on the
profitability of flash sale:
“The mechanics of the daily deals industry parallel the advertising industry. Both
seek to attract customers to the merchants they represent. As with the advertising
industry, while interest elicited among the customers is important, the eventual success
is measured by the impact on the merchants with whom they partner. In this three-way
arrangement, it is clear from the growing number of subscribers that customers are
apparently satisfied. Thus, success is not hinged on whether customers will buy.
Rather, the success of the industry is dependent on the willingness of merchants to
“buy” offers from the daily deal providers.”
Having these factors create the question of how transacting companies and host
website reflect revenues on each transaction; having the proper accounting procedures
and accounting standards to be applied as the main focus of the study.
Research Question: What accounting procedures and standards are applied by
transacting companies and host websites in reflecting their revenues? Considering the
absence of such transaction on existing local standards, are companies uniformly
applying a certain standard that would reflect revenues properly?
Hypothesis 1: Both the transacting companies and host websites are using IFRS based
standard in accounting for revenues under flash sales transactions.
Hypothesis 2: Both transacting companies and host websites are not using IFRS based
standards in accounting for revenues under flash sales transactions but use a common
standard adopted from other GAAP.
Hypothesis 3: In its absence in the local standards, there is no uniformity as to the
standard being applied by each company on flash sales transactions.