CHAPTER 2 – PREMIUM LIABILITY

PREMIUMS
Premiums are articles of value such as toys, dishes, 2. To record the purchase of the premiums:
silverware and other goods and in some cases cash
payments, given to customers as result of past sales or Premiums – soup bowls 100,000
sales promotion activities. Cash 100,000
In order to stimulate the sale of their products, entities
offer premiums to customers in return for product labels,
box tops, wrappers and coupons. 3. To record the redemption of 4,000 wrappers:
Accordingly, when the merchandise in sold, an
accounting liability for the future distribution of the Cash (800 × 10) 8,000
premium arises and should be given accounting Premium expense (800 × 40) 32,000
recognition. Premiums – soup bowls (800 × 50) 40,000
(4,000 wrappers / 5 = 800 bowls distributed)
The accounting procedures for the acquisition of
premiums and recognition of the premium liability are as
follows: 4. To record the liability for the premiums at the end of
the first year:
1. When premiums are purchased:
Premium expense 16,000
Premiums xx Estimated premium liability 16,000
Cash xx

2. When premiums are distributed to customers: Computation

Wrappers to be redeemed (60% × 10,000) 6,000
Premium expense xx Less: Wrappers redeemed 4,000
Premiums xx Balance 2,000

3. At the end of the year, if premiums are still Premiums to be distributed (2,000 / 5) 400
outstanding:
Estimated liability (400 × 40) 16,000
Premium expense xx
Estimated premium liability xx Financial statement classification
At the end of the year, the accounts related to the
premium plan are classified as follows:
Current asset:
Illustration Premiums – soup bowls 60,000
An entity manufactures a certain product and sells it at
P300 per unit. Current liability:
A soup bowl is offered to customers on the return of 5 Estimated premium liability 16,000
wrappers plus a remittance of P10.
Distribution cost:
The bowl costs P50, and it is estimated that 60% of the
Premium expense 48,000
wrappers will be redeemed.
The data for the first year concerning the premium plan
are summarized below.
FREE PRODUCT, DISCOUNT AND REBATE
Sales, 10,000 units at P300 each 3,000,000
IFRS 15, paragraph 22 provides that at contract
Soup bowls purchased, 2,000 units at P50
inception, an entity shall assess the goods promised in a
each 100,000
contract with customer & shall identify as a performance
Wrappers redeemed 4,000
obligation each promise to transfer to the customer
The entries that would be made in the first year to record either:
the sales, premium purchases and redemption, and  A distinct good
year-end adjustment are:  A series of distinct goods that are substantially
the same, & have the same pattern of transfer to
1. To record the sales: customer
The option to purchase additional goods provides the
Cash 3,000,000
customer the material right (the customer in effect pays
Sales 3,000,000 the seller in advance for future delivery of additional
CHAPTER 2 – PREMIUM LIABILITY

goods) gives rise to performance obligation that the

seller must satisfy. Cash 2,700,000
Sales 2,160,000
Two (2) Performance Obligations: Deferred revenue - coupons 540,000
1. To deliver the goods/products sold.
2. To satisfy the customer options for coupons for free
2. To record the delivery of 150 free products in 2022:
product, discount and rebate.

IFRS 15, paragraph 74 states that, “An entity is required Deferred revenue – 135,000
to allocate the transaction price of goods sold between coupons
the products sold & the customer options based on Sales 135,000
relative stand-alone selling price.”
(The allocated transaction price of the customer options Stand-alone selling price of 600 coupons 540,000
shall be deferred, & recognized as income when options Coupons redeemed (150/600 × 540,000) 135,000
are exercised or when options expire.) Deferred revenue – December 31, 2022 405,000
Stand-alone Selling Price (SSP)
 Free Product Coupons
SSP = Selling price of the free product adjusted by
the expected redemption
 Discount Coupons
SSP = Amount of discount on future purchases Illustration – Discount coupons
adjusted by the expected redemption An entity is a retailer that sells clothing. The entity has
 Rebated Coupons launched a promotional campaign wherein customers
SSP = Discount on the products sold during the year who buy clothing with single purchase of at least
adjusted by the expected redemption P10,000 shall be granted “40% discount coupons” on
future purchases. The coupons may be used for 3
Illustration – Free product coupons months following immediately the campaign.
An entity sells shelf organizers for P1,500 each. There is
During the campaign, the entity. sold clothing worth
a promotion wherein if a customer buys 3 pieces in a
P7,600,000 and issued simultaneously 100 “40%
single transaction, a customer receives a coupon for one
discount coupons” to the customers.
additional piece for free.
It is expected that 80% of the coupons will be redeemed
During 2021, the entity sold 1,800 pieces or an
and the customers using the discount coupons will
equivalent of 600 free additional pieces. The selling price
spend an average price of P12,500.
of the products sold is 1,800 multiplied by P1,500 or
P2,700,000. The stand-alone selling price of the discount coupons is
equal to the amount of discount on future purchases
It is expected that 75% of the coupons will be redeemed.
adjusted by the expected redemption.
During 2022, the entity delivered 150 free additional
pieces to the customer. Average price of future purchases 12,500
Multiply by number of discount coupons 100
The stand-alone selling price of the coupons is equal to
Total amount of future purchases 1,250,000
the selling price of the free product adjusted by the
Multiply by percentage of discount 40%
expected redemption.
Total discount on future purchases 500,000
Number of free additional product (1,800/3) 600 Expected redemption 80%
Multiply by actual selling price 1,500 Stand-alone selling price of coupons 400,000
Selling price of free products 900,000
Expected redemption 75% Stand-alone Fraction Allocated
Stand-alone selling price of coupons 675,000 Products sold 7,600,000 76/80 7,220,000
Coupons 400,000 4/80 380,000
Allocation of transaction price 8,000,000 7,600,000
Stand-alone Fraction Allocated
Products sold 2,700,000 2,700/3,375 2,160,000 The fractions are multiplied by the selling price of
Coupons 675,000 675/3,375 540,000 products of P7,600,000 to get the allocated transaction
3,375,000 2,700,000 price of the products sold and the discount coupons.
1. To record the sales:
The fractions are multiplied by the selling price of the
products sold of P2,700,000 to get the allocated Cash 7,600,000
transaction price for the products and coupons. Sales 7,220,000
1. To record the sales for 2021: Deferred revenue - coupons 380,000
CHAPTER 2 – PREMIUM LIABILITY

2. To record the redemption of coupons:

Cash 600,000
Deferred revenue – 380,000
coupons
Sales 980,000

Total amount of future purchases 1,250,000

Discount (40% × 1,250,000) (500,000)
Net price 750,000
Expected redemption 80%
Cash received from customers 600,000
CHAPTER 2 – PREMIUM LIABILITY

Illustration – Rebate Coupons Expected value of breakage (5M × 10%) 500,000

An entity is a manufacturer and sells its product to local Expected value of certificates to be
retailers. Retailers sell the product to its customers and redeemed (5M × 90%) 4,500,000
for each product purchased by the customers, a coupon Value of certificates redeemed 1,800,000
of P50 discount is given and may be used on future
purchase of the same product. Retailers are reimbursed The breakage revenue is equal to the proportion of value
for the discount by the manufacturer. of certificates redeemed to the expected value of
During the current year, the manufacturer sold 30,000 certificates to be redeemed multiplied by the expected
products to the retailers at P150 each product or value of breakage.
P4,500,000. It is expected that 75% of the coupons will Breakage revenue (1.8M/4.5M × 500,000) 200,000
be redeemed. At year-end, the manufacturer paid the
retailer P200,000 as reimbursement. 1. To record the sales of gift certificates:

Number of products sold 30,000 Cash 5,000,000

Multiply by discount per coupon 50 Deferred revenue – gift certificates 5,000,000
Total amount of discount 1,500,000
Expected redemption 75%
2. To record the value of certificates redeemed:
Stand-alone selling price of rebate coupons 1,125,000
Stand-alone Fraction Allocated Deferred revenue – GC 1,800,000
Products sold Sales 1,800,000
(30,000 × 150) 4,500,000 4,500/5,625 3,600,000
Rebate coupons 1,125,000 1,125/5,625 900,000 3. To record the breakage revenue:
5,625,000 4,500,000
1. To record the sales to retailers: Deferred revenue – GC 200,000
Breakage revenue 200,000
Cash 4,500,000
Sales 3,600,000
Rebate liability 900,000
CUSTOMER LOYALTY PROGRAM – IFRS 15
2. To record the reimbursement to retailers: Many entities use a customer loyalty program to build
brand loyalty, retain their valuable customers and of
Rebate liability 200,000 course, increase sales volume.
Cash 200,000 The customer loyalty program is generally designed to
reward customers for past purchases and to provide
them with incentives to make further purchases.
GIFT CERTIFICATES If a customer buys goods or services, the entity grants
 Sold by entity in exchange for future delivery of the customer award credits often described as "points".
goods
 Nonrefundable The entity can redeem the "points" by distributing to the
 Some customers might not redeem the GC customer free or discounted goods or services.
 Under IFRS 15, non-redemption of the GC is A customer loyalty program operates in a variety of
referred to as “breakage” ways.
 Breakage Revenue is equal to the proportion of
value of certificates redeemed to the expected value Customers may be required to accumulate a specified
of certificates to be redeemed multiplied by the minimum number of award credits or "points" before they
expected value of breakage. (VCR/EVCtbR × EVB) can be redeemed.

Illustration
During the current year, an entity sold gift certificates
worth P5,000,000 to customers in exchange for future
delivery of its product.
The gift certificates are nonrefundable and the entity
expects that 10% of the certificates will not be
redeemed.
The entity redeemed gift certificates worth P1,800,000
during the current year.
Measurement
An entity shall account for the award credits as a
“separately 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.
CHAPTER 2 – PREMIUM LIABILITY

In other words, the fair value of the consideration Management continues to expect that only 9,000 points
received with respect to the initial sale shall be allocated will ever be redeemed, meaning, no more points will be
between the award credits and the sale based on redeemed after 2022.
relative stand-alone selling price.
Stand-alone Fraction Allocated
The stand-alone selling price is the price at which an
Products sales 9,000,000 9/10 8,100,000
entity would sell a promised good or service separately
to a customer. Points (10,000 × 100) 1,000,000 1/10 900,000
10,000,000 9,000,000

Journal entries
The initial sale in 2020 is recorded as follows:
Recognition
The consideration allocated to the award credits is Cash 9,000,00
initially recognized as deferred revenue and 0
subsequently recognized as revenue when the award Sales 8,100,000
credits are redeemed. Unearned revenue – points 900,000

The amount of revenue recognized shall be based on Redemption of 4,000 points in 2020
the number of award credits that have been redeemed Unearned revenue – points 450,000
relative to the total number expected to be redeemed. Sales 450,000
The estimated redemption rate is assessed each period.
Changes in the total number expected to be redeemed Revenue to be recognized in 2020
do not affect the total consideration for the award credits. (4,000/8,000 × 900,000) 450,000
Instead, the changes in the total number of award credits
expected to be redeemed shall be reflected in the Redemption of 4,100 points in 2021
amount of revenue recognized in the current and future Unearned revenue – points 360,000
periods. Sales 360,000
In other words, the calculation of the revenue to be
Points redeemed in 2020 4,000
recognized in any one period is made on a “cumulative
Points redeemed in 2021 4,100
basis” in order to reflect the changes in estimate.
Total points redeemed to Dec. 31, 2021 8,100
Illustration – IFRS 15
An entity, a grocery retailer, operates a customer loyalty Cumulative revenue on Dec. 31, 2021
program. (8,100/9,000 × 900,000) 810,000
Revenue recognized in 2020 (450,000)
The entity grants program members loyalty points when Revenue to be recognized in 2021 360,000
they spend a specified amount on groceries.
Program members can redeem the points for further Redemption of 900 points in 2022
groceries. The points have no expiry date. Unearned revenue – points 90,000
Sales 90,000
The sales during 2020 amounted to P9,000,000 based
on stand-alone selling price.
Points redeemed in 2020 4,000
During 2020, the customers earned 10,000 points. Points redeemed in 2021 4,100
But management expects that 80% or 8,000 of these Points redeemed in 2022 900
points will be redeemed. Total points redeemed to Dec. 31, 2022 9,000

The stand-alone selling price of each loyalty point is
estimated at P100.
On December 31, 2020, 4,000 points have been
redeemed in exchange for groceries.
In 2021, the management revised expectations and now
expects that 90% or 9,000 points will be redeemed
altogether.
During 2021, the entity redeemed 4,100 points. In 2022,
a further 900 points are redeemed.
Cumulative revenue – Dec. 31, 2022
(9,000/9,000 × 900,000) 900,000
Cumulative revenue – Dec. 31, 2021 (810,000)
Revenue to be recognized in 2022 90,000
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.
CHAPTER 2 – PREMIUM LIABILITY

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 totaling P4,500,000 based on stand-
alone selling price and granted 5,000 points with stand-
alone selling price of P100 per point.
Stand-alone Fraction Allocated
Products sales 4,500,000 45/50 4,050,000
Points (5000 × 100) 500,000 5/50 450,000
5,000,000 4,500,000
Revenue from points 450,000
Payment to airline (5,000 × 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.

To record the initial sale

Cash 4,500,00
0
Sales 4,050,000
Revenue from points 450,000

To record payment to airline

Loyalty program expense 300,000
Cash 300,000