Dealer incentives and rebates

Which dealer incentives reduce revenue?

IFRS 15 treats consideration payable to a customer, including to parties further down the distribution chain who buy from the customer, as a reduction of the transaction price, unless it pays for a distinct good or service the carmaker receives. Volume bonuses to dealers, cash-back and loyalty offers to drivers, conquest bonuses for switching from another brand and stock support for run-out models all reduce revenue. Payments for distinct services, such as a dealer's advertising carried out for the carmaker at fair value, are expenses instead. See variable consideration.

Dealer incentives: estimating at the time of sale

A carmaker sells 1,000 vehicles to dealers at US$ 30,000 each. Dealers earn a volume bonus of 2% of the price if they meet quarterly targets, which the carmaker expects 80% of them to do based on recent quarters, and the model carries a retail cash-back offer of 800 per vehicle, which the carmaker has offered continuously on this model.

The carmaker recognises revenue of 28.72 million when control of the vehicles passes to the dealers, and a refund liability of 1.28 million for the incentives it expects to pay. The volume bonus uses the expected value because there are many dealers; the estimate is constrained to the amount for which a significant reversal is highly unlikely, and updated each period, with changes adjusting revenue.

What if a new programme is launched for dealer stock?

Suppose that two months later, with 400 of the vehicles still unsold at dealers, the carmaker adds a further 500 cash-back offer to clear them. If the carmaker had no practice of adding such offers, and dealers had no reasonable expectation of one, the extra incentive was not part of the original estimate. It is recognised when the carmaker announces it: revenue is reduced by 200,000 immediately, for the vehicles already sold to dealers and still in their stock. If the carmaker routinely adds incentives as models age, those expected additions belong in the estimate from the start.

How are subsidised finance offers treated?

A 0% finance offer is paid for by the carmaker, which compensates its captive finance company or a bank for the lost interest. In the carmaker's own accounts, that compensation is consideration payable to the driver through the distribution chain, so it reduces vehicle revenue. In the group accounts, where the captive's loan is measured at fair value, the difference between the loan's nominal amount and its fair value at a market rate reduces revenue, and the captive earns market interest over the loan. See captive finance and leasing.

How are incentive liabilities presented?

Amounts the carmaker expects to pay to dealers and drivers for vehicles already sold are refund liabilities under IFRS 15, not provisions under IAS 37, and are often among the largest current liabilities of a carmaker. If the carmaker settles bonuses as credits against future dealer invoices, the liability is still recognised when the related vehicles are sold. Disclosures explain the estimation method and significant changes. The dealer's side of the same incentives, usually a reduction of inventory cost, is covered in car dealer revenue.

How does US GAAP differ?

ASC 606 gives the same answer: sales incentives are variable consideration estimated at the time of sale where the carmaker has a practice of offering them, and recognised when offered otherwise. Before ASC 606, US carmakers recognised incentives at the later of the sale and the announcement of the programme, so the estimate-at-sale approach was a significant change for them. See automotive accounting.

This guide is general information. It is not tax or legal advice for your situation.