Accounting for Rebates and Vendor.

Customer Incentives - Final

Date Issued: November 2014
Author: Matt Murray

1.0: Purpose

The following policy is intended to be a resource for finance professionals at Ingredion (the
“Company”) for guidance on specific accounting methods and application of US Generally
Accepted Accounting Principles (“US GAAP”). This policy does not replace or alter applicable
US GAAP; however, it is merely intended to assist in the consistent accounting across the
Company. Since all circumstances cannot be addressed in their entirety by these
guidelines, professional judgment is necessary in their application. When handling is in
question, please contact the Corporate Controller’s Group (Corporate Controller or Director
of Accounting Policy/Research).

2.0: Persons Affected

This policy is applicable to all domestic and international locations for Ingredion
Incorporated and all consolidated subsidiaries.

3.0: Applicable US GAAP Accounting Guidance

ASC 605 – Revenue Recognition – Customer Payments and Incentives

4.0: Policy

Rebates or Refunds Earned – Purchase Incentives

In certain circumstances, the Company earns rebates based on the volume or dollar amount
of purchases over a specified time period. The rebates are typically paid from the vendor to
Ingredion in the form of cash consideration but can also be paid via credits for future
purchases or in other forms of consideration (e.g. free products).

4.1 A rebate or refund of a specified amount of cash consideration that is payable pursuant
to a binding arrangement only if the entity completes a specified cumulative level of
purchases or remains a customer for a specified time period should be recognized as a
reduction of the cost of goods sold (or SG&A if related to SG&A expenses) based on a
systematic and rational allocation of the cash consideration offered to each of the underlying
transactions that results in progress by the entity toward earning the rebate or refund
provided the amounts are probable (at least 75% likelihood) and can be reasonably
estimated. If the rebate or refund is not probable and cannot be reasonably estimated, it
should be recognized as the milestones are achieved.

4.1.1 The ability to make a reasonable estimate of the amount of future cash rebates
or refunds depends on many factors and circumstances that will vary from case to
case. However, any of the following factors may impair an entity’s ability to
determine whether the rebate or refund is probable and can be reasonably
estimated:

a) The rebate or refund relates to purchases that will occur over a relatively long
period (i.e. multiple years)
Accounting for Rebates and Vendor.Customer Incentives - Final
Date Issued: November 2014
Author: Matt Murray

b) There is an absence of historical experience with similar product or the inability to

apply such experience because of changing circumstances

c) Significant adjustments to expected cash rebates or refunds have been necessary

in the past

d) The product or purchase is susceptible to significant external factors

4.1.2 Changes in the estimated amount of cash rebates or refunds and retroactive
changes by a vendor to a previous offer are changes in estimate that should be
recognized using a cumulative catch-up adjustment in the period of the change.

Example: Entity A is offered a $100,000 cash rebate from a vendor if Entity A

purchases $1,000,000 of product from this vendor during fiscal year 2014. Based on
past experience with the vendor, Entity A determines that it is probable that they will
purchase at least $1,000,000 from the vendor during 2014 and therefore will earn
the purchase incentive. In addition, Entity A determines that based on Goal and
recent estimates that $2,000,000 of product will be purchased from the vendor
during fiscal year 2014. As such, Entity A records the following entry ratably over
the first $1,000,000 in purchases from the vendor (up to the $100,000 total):

Dr. Rebate Receivable XX

Cr. Cost of Goods Sold/Inventory XX

4.1.3 In certain instances, the Company is offered cash incentives (purchase

incentives) to early pay amounts owed to vendors such as under terms 2/10, net 30
meaning that a 2% discount is offered if paid within 10 days and the net amount is
owed in 30 days. When purchase discounts are offered to the Company, they should
be recorded under the gross method, which means that they should be reflected
when actually taken based on the type of expenditure:

 If cash incentive relates to SG&A expense, discount taken should be a reduction

of SG&A expenses

 If cash incentive relates to a reduction in a raw material costs, the discount

should result in a reduction in inventory

4.1.4 If the rebates earned relate to a reduction in multiple different costs (both
SG&A and COGS) and are significant, then a reasonable allocation should be
performed to properly classify this reduction in expenses to the appropriate income
statement category.

Rebates or Refunds Incurred – Sales Incentives

4.2 Ingredion may offer a customer a rebate or refund of a specified amount of cash
consideration that is redeemable only if the customer completes a specified cumulative level
of revenue transactions or remains a customer for a specified period of time. Ingredion
should recognize the rebate or refund obligation as a reduction in revenue (contra-revenue)
Accounting for Rebates and Vendor.Customer Incentives - Final
Date Issued: November 2014
Author: Matt Murray

based on a systematic and rational allocation of the cost of honoring rebates or refunds
earned and claimed to each of the underlying revenue transactions that result in progress
by the customer toward earning the rebate or refund. Measurement of the total rebate or
refund obligation should be based on the amount the customer will ultimately earn under
the offer if it can be reasonably estimated. If the amount of future rebates or refunds
cannot be reasonably estimated, a liability should be recognized for the maximum potential
amount of the refund or rebate. The ability to make a reasonable estimate of future rebates
or refunds depends on many factors and circumstances that will vary from case to case,
though any of the following factors could impair Ingredion’s ability to make a reasonable
estimate:

a) Relatively long periods in which a particular rebate or refund may be claimed

b) The absence of historical experience with similar types of sales incentive programs
with similar products or the inability to apply such experience because of changing
circumstances.

c) The absence of a large volume of relatively homogeneous transactions

4.2.1 It is generally the case that the total refund or rebate obligation would be able
to be reasonably estimated and that only in rare situations would the maximum
amount of the total obligation be recorded.

4.2.2 In some cases, the relative size of the rebate or refund changes based on the
volume of purchases. For example, the rebate may be 10% of total consideration if
more than 100 units are purchased but may increase to 20% if more than 200 units
are purchased. If the volume of a customer’s future purchases cannot be reasonably
estimated, the maximum potential rebate or refund should be used to record a
liability (20% in the example). In contrast, if the volume of a customer’s future
purchases can be reasonably estimated, the estimated amount to be rebated or
refunded should be recognized as a liability on a ratable basis.

Example: On January 1, 2014, Entity A offers a cash refund of $100,000 to a

customer if, during calendar year 2014 the customer purchases 10,000 units.
Historically, the customer has purchased 15,000 units and Entity A believes the
customer will purchase a similar amount in 2014. Based on an evaluation of the
circumstances, Entity A should accrue the rebate incurred over the purchase of the
first 10,000 units; provided that it is probable and reasonably estimated that the
customer will purchase at least 10,000 units during 2014.

Dr. Contra-Sales XX
Cr. Accrued Expense – Rebate Obligation XX

4.2.3 Changes in the estimated amount of rebates or refunds incurred and

retroactive changes by Ingredion to a previous offer to a customer (increases or
decreases in the rebate amount that is applied retroactively) should be recognized
Accounting for Rebates and Vendor.Customer Incentives - Final
Date Issued: November 2014
Author: Matt Murray

using a cumulative catch-up adjustment. Ingredion would adjust the balance of its
obligation to the revised estimate immediately and would reduce revenue on future
sales based on the revised rebate obligation as computed.

4.2.4 Cash consideration (including a sales incentive) given by Ingredion to a

customer is presumed to be a reduction of the selling prices of Ingredion’s products
and, therefore, should be classified as a reduction of revenue (contra-sales) on the
entity’s income statement.

4.2.5 If the consideration consists of a free product or anything other than cash
(credits that the customer can apply against trade amounts owed to Ingredion
counts as cash), the cost of the consideration should be classified as an expense (not
a contra-revenue) on the entity’s income statement.

Example: Entity A agrees to provide an incentive for a customer if they reach

$1,000,000 in annual sales for any given year. This incentive will be in the form of
$50,000 in free product to be provided to the customer after this milestone is
reached. Entity A determines that it is probable that the customer will reach this
milestone and therefore accrues an expense related to this incentive ratably over the
fiscal year via the following entry:

Dr. Cost of Goods Sold $50,000

Cr. Accrued Expenses $50,000

After year-end, Entity A settles this obligation by shipping the $50,000 worth of
product to the customer as requested. The following journal entry is recorded:

Dr. Accrued Expenses $50,000

Cr. Inventory $50,000

4.3 If early pay discounts are offered to customers and the customers take advantage of
this early pay discount, the difference between the face amount of the invoice and the
amount paid by the customer should be recognized as a reduction in net sales (contra-
sales) under the gross method which reflects cash discounts in the period they are taken by
the customer.

Example: Entity A offers payment terms of 2/10, net 30 to their customers which allows
the customers a 2% discount if they pay within 10 days and the remaining balance owed in
30 days. Customer A purchases product from Entity A for a total amount of $10,000 and
decides to pay the invoice on Day 10 and pays $9,800. As such, Entity A should record the
following journal entries to record these events under the gross method (net method not
acceptable):

Entry to Record Sale to Customer

Dr. Accounts Receivable $10,000
Cr. Net Sales $10,000
Accounting for Rebates and Vendor.Customer Incentives - Final
Date Issued: November 2014
Author: Matt Murray

Entry if Payment by Customer within 10 days

Dr. Cash $9,800
Dr. Net Sales – Discounts $200
Cr. Accounts Receivable $10,000

Entry if Payment by Customer after 10 days

Dr. Cash $10,000
Cr. Accounts Receivable $10,000

If cash discounts are offered to customers, the entity needs to ensure sufficient processes
and procedures are in place to ensure cash paid to Ingredion is correctly applied to the
appropriate account receivable and that the remaining balance in accounts receivable is
timely adjusted to reflect the cash discount taken.

5.0: Definitions

N/A

6.0: Responsibilities

N/A

7.0: Related Documents

N/A

8.0: Exhibits

Account Table:

SAP Account SAP Hyperion Hyperion Description of

Description Account Description Intended Use of
Account

9.0: Change Matrix

Section Reason for Change Date

Accounting for Rebates and Vendor.Customer Incentives - Final
Date Issued: November 2014
Author: Matt Murray

All Initial issuance 11/5/14