Free goods and samples

What are free goods and samples?

Free goods are extra units given with a purchase. To retailers, they take the form of free cases with an order, free stock for a new store or launch, or free goods earned by reaching a volume target. To shoppers, they appear as bonus packs, extra-fill packs and buy-one-get-one-free offers. Samples are product given away with no purchase at all, to consumers in stores and at events, to retail staff, or to professionals who recommend products, such as pharmacists. See FMCG accounting.

How does IFRS 15 treat free goods given with a purchase?

A promise to deliver extra goods is part of the contract with the retailer, so the free goods are performance obligations like the paid ones. The transaction price, what the retailer pays for the whole deal, is allocated to all the goods in proportion to their standalone selling prices, and revenue is recognised as each is delivered. The effect is that the free goods act as a discount spread across the whole order. Their cost is part of cost of sales, because they are goods sold under the contract, not marketing. See allocating the transaction price.

Free goods: buy ten cases, get one free

A drinks supplier offers a retailer one free case for every ten it buys. The retailer orders 1,000 cases at the list price of US$ 60 a case, paying 60,000, and is entitled to 100 free cases. Each case costs the supplier 35 to make. All 1,100 cases have the same standalone selling price, so the price allocated to each case is 60,000 ÷ 1,100 = 54.55. Consider two versions: in the first, all 1,100 cases are delivered together before the year end; in the second, the 1,000 paid cases are delivered before the year end and the 100 free cases follow next month.

When the free cases arrive with the order, all 60,000 is revenue and the cost of all 1,100 cases is cost of sales. When they follow next month, 5,455 of the price relates to goods not yet delivered, so it is a contract liability at the year end and becomes revenue next month, together with the 3,500 cost of the free cases. A supplier that recognised all 60,000 as revenue on the first delivery and treated the free cases as a marketing cost later would overstate this year's revenue and gross margin.

What if the free goods depend on future purchases?

A promise of free goods with the next order, regardless of whether the retailer buys more, is a promise in the current contract, so part of today's price is deferred as above. A right to free goods only if the retailer makes further purchases, such as ten free cases once it has bought a hundred during the year, is an option for future goods. If it gives the retailer something it would not get without the earlier purchases, it is a material right: part of the price of each qualifying purchase is deferred until the free goods are delivered or the right lapses. If the free goods simply reflect the price any retailer would pay for that volume, there is nothing to defer. See volume rebates to retailers.

How are bonus packs and buy-one-get-one-free offers treated?

When a manufacturer sells a bonus pack, such as a pack with 20% extra free or two bottles banded together, to a retailer at a set price, the "free" product is simply part of the product sold. There is nothing to allocate: revenue is the price of the pack, and the extra product is in its cost. When a retailer runs a buy-one-get-one-free offer on the manufacturer's normal packs and the manufacturer reimburses it for the free units, the reimbursement is consideration payable to a customer and reduces the manufacturer's revenue. See trade promotion spending.

How are samples accounted for?

Samples given away with no purchase do not involve a contract with a customer, so there is no revenue. IAS 38 treats goods used for advertising and promotion as an expense when the company has the right to access them, so samples bought or made specifically for promotion are generally expensed then, rather than held as inventory until handed out. Product taken from saleable stock for sampling is expensed when it is taken. The cost is usually presented in marketing or selling expenses. Where samples are given to a retailer as part of a sales deal, such as tester units supplied with an order, they are part of that contract and treated like free goods. See advertising and marketing costs.

How does US GAAP differ?

ASC 606 allocates the price to free goods in the same way and defers revenue for free goods still to be delivered. One difference is that ASC 606 lets a company ignore promised goods or services that are immaterial in the context of the contract, although not customer options that are material rights. IFRS 15 has no such explicit exemption, though the general concept of materiality still applies. Samples given with no purchase are expensed under both frameworks. See IFRS 15 and ASC 606 compared.

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