addresses accounting by a customer (including a reseller) for certain consideration received from a vendor (e.g., supplier or manufacturer). The consideration received could be cash, a credit, or some other form of incentive (e.g., a coupon or voucher) that reduces the amount owed. The accounting model in ASC 705-20
largely mirrors the model in ASC 606
for vendors that make payments to customers (see RR 4
) in that consideration received from a vendor is generally accounted for as a reduction of the purchase price of the goods or services acquired from the vendor. Consideration that is contingent upon meeting a milestone, such as a cumulative level of purchases, is recognized when the amounts are probable and can be reasonably estimated based on a systematic and rational allocation to the underlying transactions.
describes three exceptions to that general model:
- Consideration received in exchange for a distinct good or service
- Reimbursement of costs incurred by the reporting entity to sell the vendor’s products
- Reimbursement of sales incentives offered by the vendor to end customers
In less common situations, a payment may be unrelated to the customer-vendor relationship (e.g., the resolution of a separate commercial dispute) and subject to other guidance, such as the guidance for contingent gains (see FSP 23.5
Distinct good or service
If payments are received in exchange for a distinct good or service that the reporting entity transfers to the vendor, the reporting entity should recognize the payment as revenue, assuming the goods or services are an output of the reporting entity’s ordinary activities. In other words, the reporting entity should account for the sale the same way it accounts for sales to other customers. The assessment of whether a good or service is distinct is a two-pronged test: the good or service must be both (1) capable of being distinct and (2) separately identifiable. See RR 3.4
If the amount of consideration received from the vendor exceeds the standalone selling price of the distinct good or service that the reporting entity transfers to the vendor, the reporting entity should account for the excess amount pursuant to the general principle for vendor consideration (i.e., as a reduction of the purchase price of the goods or services acquired from the vendor). See RR 5.2
for guidance on the determination of the standalone selling price.
Reimbursement of costs
A reporting entity may report reimbursement of costs incurred to sell the vendor’s products (e.g., cooperative advertising) as a reduction of that cost in its income statement. However, the consideration must be for reimbursement of specific, incremental, identifiable costs incurred by the reporting entity to sell the vendor's products. If the amount of consideration received from the vendor exceeds the costs being reimbursed, the reporting entity should account for the excess amount as a reduction of the purchase price of the goods or services acquired from the vendor.
Reimbursement of sales incentives
In some cases, a vendor provides consideration to resellers to reimburse them for sales incentives (e.g., rebates or coupons) offered to end customers to stimulate consumer demand for the vendor’s products. The reseller may in turn reduce the price paid by the end consumer at the point of sale and will later receive reimbursement from the vendor. In other scenarios, the end customer may interact directly with the vendor to claim sales incentives for products purchased from a reseller (e.g., mail-in rebate). In both scenarios, the reseller generally has no control over which consumers receive or choose to apply these incentives. Effectively, the reseller is acting as the vendor’s agent when it provides the incentives to end consumers. Therefore, the reseller should recognize reimbursements for vendor’s sales incentives that meet the criteria in ASC 705-20-25-7
For purposes of this guidance, the phrase vendor's sales incentive offered directly to consumers is limited to a vendor's incentive that meets all the following criteria:
The incentive can be tendered by a consumer at resellers that accept manufacturer’s incentives in partial payment of the price charged by the reseller for the vendor's product.
The reseller receives a direct reimbursement from the vendor (or a clearinghouse authorized by the vendor) based on the face amount of the incentive.
Terms of reimbursement to the reseller for the vendor's sales incentive offered to the consumer must not be influenced by or negotiated in conjunction with any other incentive arrangements between the vendor and the reseller but, rather, may be determined only by the terms of the incentive offered to consumers.
The reseller is subject to an agency relationship with the vendor, whether expressed or implied, in the sales incentive transaction between the vendor and the consumer.
If the criteria in ASC 705-20-25-7
are not met, the reseller should account for the consideration as a reduction of the purchase price of the goods or services acquired from the vendor.
Example FSP 3-1, Example FSP 3-2, and Example FSP 3-3 illustrate the accounting for consideration received from a vendor.
EXAMPLE FSP 3-1
Consideration received from a vendor – no distinct good or service provided
FSP Corp enters into a supply contract with Water Company to purchase water bottles for $100,000. Water Company provides FSP Corp with $10,000 to ensure that its products receive prominent placement on store shelves (that is, it pays a slotting fee).
How should FSP Corp account for the $10,000 payment from Water Company?
FSP Corp should recognize the consideration received as a reduction of the purchase price of the water bottles because it has not provided a distinct good or service to Water Company in exchange for this fee. Also, the consideration is not a reimbursement of specific, incremental, and identifiable costs incurred by FSP Corp to sell the vendor’s products. Assuming the water bottles are initially held in inventory by FSP Corp prior to their eventual sale, the cost of the inventory would be reduced by $10,000 on a per unit basis such that cost of sales will be reduced when recognized in FSP Corp’s income statement.
EXAMPLE FSP 3-2
Cooperative advertising – costs are specific, incremental, and identifiable
FSP Corp enters into a supplier agreement with Toy Company to purchase toys to sell through its website. Toy Company has also committed to reimburse 50% of FSP Corp’s advertising costs related to toys purchased from Toy Company. FSP Corp will contract directly with the advertising agencies and pay for the total cost of the campaign. FSP Corp is required to provide Toy Company with the associated proof of payment for advertisements that feature Toy Company’s products. FSP Corp’s expenses for these advertisements are $2,000, and it expects to receive $1,000 from Toy Company.
How should the advertising costs reimbursed by Toy Company be recorded by FSP Corp?
FSP Corp would likely conclude in this fact pattern that the reimbursement relates to specific, incremental, and identifiable costs incurred in selling Toy Company’s products. FSP Corp should therefore recognize the $1,000 received from Toy Company as a reduction of advertising costs in its income statement.
EXAMPLE FSP 3-3
Cooperative advertising – costs are not specific, incremental, and identifiable
FSP Corp enters into a supplier agreement with Toy Company to purchase board games to sell through its website. The agreement also includes payment of an advertising allowance of $1,000 to FSP Corp by Toy Company. FSP Corp has discretion over the use of the allowance, and it is not required to provide Toy Company with supporting documentation of how the allowance was utilized.
How should the $1,000 advertising allowance be recorded by FSP Corp?
FSP Corp would likely conclude in this fact pattern that the reimbursement does not relate to specific, incremental, and identifiable costs incurred in selling Toy Company’s products. FSP Corp should therefore recognize $1,000 as a reduction of the cost of its purchases from Toy Company and, using a systematic and rational allocation approach, recognize a corresponding reduction in costs of sales when the related products are sold.