Premium

Liability
Lesson 2

Technical Knowledge
● To know the recognition of a premium liability.
● To know the recognition of coupons for free product.
● To know the recognition of coupons for discount.
● To know the recognition of coupons for rebates.
● To understand the recognition and measurement of a customer
loyalty program.

DEFINITION
These are articles of value such as toys, dishes, silverware, and other
goods and in some cases cash payments, given to customers as result
of past sales or sales promotion activities. Entities offer premiums to
customers in return for product labels, box tops, wrappers and
coupons.
ACCOUNTING FOR PREMIUMS
1. Acquisition – debit Premiums; credit Cash

2. Distribution – debit Premium expense; credit Premiums

3. Outstanding – debit Premium expense; credit Estimated premium

Liability

PRESENTATION/CLASSIFICATION IN FINANCIAL
STATEMENTS
a. Premiums – Current asset

b. Estimated premium liability – Current liability

c. Premium expense – Distribution cost

Problem2-1. Miracle Company manufactures a product that is packaged and
sold. A plate is offered to customers sending in three wrappers accompanied
by a remittance of P10. Distribution cost P20/plate. Data with respect to the
premium offer are summarized below:
2021 2022

Sales 3,600,000 4,200,000 Purchase of premium, P50 per plate 390,000 580,000 Number of plates

distributed 5,000 9,000 Estimated Number of plates to be distributed in subsequent period 2,000 3,000
Prepare journal entries in 2021 and 2022.

FREE PRODUCT, DISCOUNT & REBATE

Under IFRS 15, paragraph 74, an entity is required to
allocate the transaction price of goods sold between the
products sold and the customer options based on relative
stand-alone selling price.
The allocated transaction price of the customer options
shall be deferred and recognized as income when options
are exercised or when the options expire.
Problem2-5. Victoria Company sells bedsheets for P3,000 per set. There is a
promotion wherein if a customer buys 4 sets in a single transaction, the
customer receives a coupon for one additional set for free. Customers should
go to the entity’s website, fill-out a request form, input the coupon number
and submit online before the expiration date. It is expected that 80% of the
coupons will be redeemed.

During 2021, the entity sold 1,000 sets at P3,000 per set or P3,000,000. During
2022, the entity delivered 75 free additional sets.

GIFT CERTIFICATES
a. Sale – debit cash; credit Deferred revenue-gift certificates b.
Redemption – debit Deferred revenue-gift certificates; credit Sales c.
Expired/unredeemed – debit Deferred revenue-gift certificates;
Breakage revenue

Under IFRS15, the nonredemption of the gift certificates is referred to

as breakage. The breakage revenue is equal to the proportion of value
of certificates redeemed to the expected value of certificates to be
redeemed multiplied by the expected value of breakage.
Problem2-11. Marie Company sells gift certificates worth P2,500,000
to customers in exchange for future delivery of its product. The gift
certificates are nonrefundable by the customer and the entity expects
that 5% of the gift certificates will not be redeemed. During the current
year, the entity redeemed gift certificates worth P1,425,000.

CUSTOMER LOYALTY PROGRAM – IFRS 15

It is generally designed to reward customers for past purchases and to
provide them with incentives to make further purchases. The entity
grants the customer award credits often described as POINTS.

MEASUREMENT
Separate component of the initial sale transaction (IFRS 15, paragraph
74), in other words, the fair value of the consideration received with
respect to the initial sale shall be ALLOCATED between the award
credits and the sale based on relative stand-alone selling price.

RECOGNITION
The consideration allocated to the award credits is INITIALLY
recognized as DEFERRED REVENUE and SUBSEQUENTLY recognized
as REVENUE when the award credits are redeemed.
The amount of REVENUE to be recognized shall be based on the
number of award credits that have been REDEEMED relative to the
total number expected to be redeemed. It is also made on a
“CUMULATIVE BASIS” in order to reflect the changes in estimate.
Problem2-13.Arianne Company, a grocery retailer, operates a customer
loyalty program. The entity grants program members loyalty points when they
spend a specified amount on groceries. Program members can redeem the
points for groceries. The points have no expiry date.
During 2021, the sales amounted to P7,000,000 based on stand-alone selling
price. During the year, the entity granted 10,000 points. But management
expected that only 80% or 8,000 points will be redeemed. The stand alone
selling price of each loyalty point was estimated at P100.
On December 31, 2021 4,800 points have been redeemed. In 2022,
management revised its expectations and now expected that 90% or 9,000
points will be redeemed altogether. During 2022, the entity redeemed 2,400
points.
Prepare journal entries for 2021 and 2022.

Thank you!