Volume rebates to retailers

What kinds of volume rebate are there?

A retrospective rebate applies to every unit bought in the period once the retailer passes a threshold: for example, 2% of all purchases if annual purchases exceed 1 million cases, rising to 3% above 1.5 million. A prospective rebate lowers the price only on purchases above the threshold. IFRS 15's own illustrative examples treat retrospective volume discounts as variable consideration. Prospective tiers are options for future purchases at a lower price, a material right only if the discount is more than the retailer would get without the earlier purchases, such as a price below what similar retailers pay for that volume. See variable consideration. Manufacturers selling to distributors and industrial customers face the same questions; see volume rebates to customers.

Volume rebates to retailers: a year of estimates

A supplier sells to a retailer at US$ 10 a case, with retrospective rebates of 2% of all purchases above 1 million cases a year and 3% above 1.5 million. At the start of the year, the retailer is expected to buy about 1.6 million cases, so the supplier recognises revenue net of a 3% rebate. In the third quarter, sales slow, and the forecast for the year falls to about 1.45 million cases, so the expected rate drops to 2%.

When the forecast changes in quarter 3, the supplier recalculates the rebate on all sales to date at the new rate and recognises the difference in that quarter: the cumulative liability falls from 246 to 236 thousand, so quarter 3 shows a negative rebate charge and revenue above gross sales. The year ends with purchases of 1.48 million cases and a 2% rebate of 296 thousand, paid to the retailer after the year end.

Which estimation method should be used?

IFRS 15 requires the method that better predicts the amount: the most likely amount suits a single contract with a few discrete outcomes, such as whether a retailer reaches a tier; the expected value suits a large number of similar contracts, such as rebate schemes with many small wholesalers. For a large retailer, the supplier typically uses the most likely tier, supported by purchase forecasts, the retailer's plans and the trend to date. Whatever the method, the estimate is constrained: if reaching the 3% tier were uncertain, the supplier would consider whether recognising revenue at the 2% rate would avoid a significant reversal.

How are rebates presented?

Rebates owed to customers are refund liabilities, not provisions, often shown with trade and other payables or as a separate line; where the supplier has the right to offset them against receivables from the same retailer and intends to, they may be netted. Suppliers disclose the judgements in estimating rebates when material and explain significant catch-ups, because they can distort quarterly trends. See trade promotion spending.

How does the retailer account for the same rebates?

The retailer recognises rebates it expects to earn as a reduction of the cost of the goods it buys, accrued as it buys them, based on the same forecast of annual purchases, and released through cost of sales as the goods are sold; rebates on goods still in stock reduce the inventory's cost. Because both sides estimate the same thresholds, suppliers and retailers often reconcile rebate positions at each quarter end. See supplier rebates and allowances.

How does US GAAP differ?

ASC 606 treats volume rebates the same way, as variable consideration with the same estimation methods and constraint, and US consumer goods companies present them as reductions of revenue. On the retailer's side, ASC 705 requires rebates to be recognised as earned when they are probable and reasonably estimable, which leads to similar results. See FMCG accounting and slotting and listing fees.

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