Retail accounting: the key IFRS issues

Why is retail accounting different?

Retailers combine high volumes with thin margins, so small errors in inventory, rebates or returns move profit noticeably. Their main fixed cost is property, mostly leased. Revenue comes with strings attached: loyalty points, gift cards, returns and promotions. And much of their profit comes not from customers but from suppliers, through rebates and allowances that must be matched to the inventory they relate to.

Which IFRS issues matter most in retail accounting?

Why are store leases so significant?

A retailer with 300 stores on 10-year leases can carry lease liabilities larger than its equity. IFRS 16 brings each lease onto the balance sheet, so the lease term, including break clauses and renewal options, the treatment of turnover rent, and the discount rate all drive the figures. Store closures are reflected through impairment of right-of-use assets rather than onerous lease provisions. See store leases under IFRS 16.

How is retail inventory valued?

At the lower of cost and net realisable value under IAS 2. Large retailers often use the retail method, deriving cost from selling prices less a margin percentage, which IAS 2 allows when the result approximates cost. Shrinkage from theft, damage and errors is estimated between stock counts, and slow-moving or seasonal stock is written down to the price it will actually sell for after markdowns.

Which revenue issues affect retailers?

• Loyalty points are a material right: part of each sale is deferred until the points are redeemed or expire.
• Gift cards are contract liabilities until used, with breakage for cards never redeemed.
• Returns mean revenue is recognised only for goods not expected to come back, with a refund liability and an asset for the goods expected to be returned.
• Online marketplaces raise the principal or agent question: is the retailer selling the goods, or earning a commission for a third-party seller?
• Promotions and coupons reduce the transaction price or, for some vouchers, create material rights.

How are supplier rebates treated?

Volume rebates, promotional allowances and listing fees received from suppliers are usually reductions in the cost of purchases, so they reduce the cost of inventory and are recognised in cost of sales as the goods are sold, not as income when agreed. Only payments for distinct services the retailer provides to suppliers, at fair value, are revenue. Accruing rebates correctly at period ends, before suppliers confirm them, is one of the most judgemental areas in retail accounting.

How are stores tested for impairment?

Each store is usually a cash-generating unit, because it generates largely independent cash inflows. Loss-making stores are tested by comparing the carrying amount of their right-of-use assets, fittings and equipment with their recoverable amount, often value in use. Online sales that customers collect in store, or that a store's presence drives, complicate the allocation of cash flows.

What other issues arise?

Franchise and concession arrangements, consignment stock held for suppliers, store pre-opening costs, which are expensed, and dilapidation provisions for restoring leased stores at the end of their leases. Retailers also report like-for-like sales, which exclude new and closed stores; under IFRS 18, from 2027, subtotals such as adjusted operating profit used in public communications become management-defined performance measures.

How does US GAAP differ for retailers?

US retailers may use LIFO for inventory, which IFRS prohibits, and under ASC 842 most store leases remain operating leases with a single straight-line cost. Revenue rules for loyalty, gift cards and returns are essentially the same. See LIFO explained and IFRS 16 vs ASC 842.

Where can I read more about each retail issue?

Each issue has its own guide: inventory, shrinkage and the retail method, loyalty programmes, gift cards and breakage, returns and refund liabilities, supplier rebates, store impairment, franchise revenue and online marketplaces. There are also guides on promotions and coupons, concessions and consignment stock and retail KPIs.

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