Discount Voucher Accounting – Ind AS 115 Compliance Guide

1. Question

Fresh Cart Limited (hereinafter referred to as ” the company”) enters into a contract with a customer to sell groceries at Rs. 220. As part of the transaction, the customer receives a voucher offering a 40% discount on a future purchase. Simultaneously, all customers receive a 10% seasonal discount. Hence, the voucher effectively offers this particular customer an additional or incremental discount of 30%.

The company assesses that, on average, customers will purchase goods worth Rs. 60 using the voucher, and there is a 75% likelihood that such vouchers will be redeemed. Despite these estimates, the company recognises the entire Rs. 220 as revenue at the time of initial sale, without deferring any revenue related to the voucher.

State whether the accounting treatment adopted by the company complies with the requirements of Ind AS 115, Revenue from Contracts with Customers.

2. Relevant Provisions

Ind AS 115, Revenue from Contracts with Customers

An extract of Para 26 – Depending on the contract, promised goods or services may include, but are not limited to, the following:

……………….

(j) granting options to purchase additional goods or services (when those options provide a customer with a material right, as described in paragraphs B39-B43).

Para B39 – Customer options to acquire additional goods or services for free or at a discount come in many forms, including sales incentives, customer award credits (or points), contract renewal options or other discounts on future goods or services.

Para B40 – If, in a contract, an entity grants a customer the option to acquire additional goods or services, that option gives rise to a performance obligation in the contract only if the option provides a material right to the customer that it would not receive without entering into that contract (for example, a discount that is incremental to the range of discounts typically given for those goods or services to that class of customer in that geographical area or market). If the option provides a material right to the customer, the customer in effect pays the entity in advance for future goods or services and the entity recognises revenue when those future goods or services are transferred or when the option expires.

Para B42 – Paragraph 74 requires an entity to allocate the transaction price to performance obligations on a relative stand-alone selling price basis. If the stand-alone selling price for a customer’s option to acquire additional goods or services is not directly observable, an entity shall estimate it. That estimate shall reflect the discount that the customer would obtain when exercising the option, adjusted for both of the following:

(a) any discount that the customer could receive without exercising the option; and

(b) the likelihood that the option will be exercised.

Para 31 – An entity shall recognise revenue when (or as) the entity satisfies a performance obligation by transferring a promised good or service (i.e. an asset) to a customer. An asset is transferred when (or as) the customer obtains control of that asset.

Para B44 – In accordance with paragraph 106, upon receipt of a prepayment from a customer, an entity shall recognise a contract liability in the amount of the prepayment for its performance obligation to transfer, or to stand ready to transfer, goods or services in the future. An entity shall derecognise that contract liability (and recognise revenue) when it transfers those goods or services and, therefore, satisfies its performance obligation.

Para B45 – A customer’s non-refundable prepayment to an entity gives the customer a right to receive a good or service in the future (and obliges the entity to stand ready to transfer a good or service). However, customers may not exercise all of their contractual rights. Those unexercised rights are often referred to as breakage.

Para B46 – If an entity expects to be entitled to a breakage amount in a contract liability, the entity shall recognise the expected breakage amount as revenue in proportion to the pattern of rights exercised by the customer. If an entity does not expect to be entitled to a breakage amount, the entity shall recognise the expected breakage amount as revenue when the likelihood of the customer exercising its remaining rights becomes remote. To determine whether an entity expects to be entitled to a breakage amount, the entity shall consider the requirements in paragraphs 56-58 on constraining estimates of variable consideration.

3. Analysis

In this scenario, the discount voucher provided to the customer is not just a marketing tool; it constitutes a material right. A material right arises when a customer receives a benefit that they would not receive without entering into the specific contract. Here, the customer gets an incremental 30% discount exclusively because of the current purchase, which is above and beyond the general 10% discount available to all customers. Therefore, this additional discount offers a benefit that qualifies as a material right.

Under Ind AS 115, a material right is treated as a separate performance obligation. This means that the company has committed not only to deliver the groceries in the initial transaction but also to provide an economic benefit (the discount) in a future purchase. Since the customer is essentially paying for this future benefit as part of the current transaction, a portion of the consideration received (Rs. 220) must be allocated to this right and deferred as revenue until it is exercised or expires.

The company’s internal estimates Rs. 60 average future purchase with a 75% probability of redemptionshould be used to calculate the standalone selling price of the voucher. This estimated selling price (Rs. 60 × 30% × 75% = Rs. 13.50) reflects the value of the material right to the customer. Accordingly, this amount should not be recognised as revenue at the time of the initial sale, but instead deferred.

By recognising the entire Rs. 220 as revenue upfront, the company has failed to identify and account for a separate performance obligation. This results in premature recognition of revenue, overstating revenue and profit in the initial sale period. Such a treatment does not reflect the economic substance of the arrangement, the customer has not yet received the full benefit they paid for. Recognising revenue for the discount voucher at a later date, either upon redemption or expiry, ensures that revenue recognition is aligned with the transfer of goods or services to the customer.

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