Incentives paid to retailers

What incentives do suppliers pay retailers?

Other guides cover temporary promotions, listing fees and volume rebates. This guide covers the rest: upfront payments for exclusivity or a multi-year supply agreement; contributions to new stores, refits and fixtures; refrigerators, display stands and other equipment placed in stores; payments for advertising on the retailer's website, app, loyalty emails and in-store screens, known as retail media; payments for the retailer's sales data; growth bonuses; and lump-sum funds agreed in annual joint business plans. See FMCG accounting, slotting and listing fees and trade promotion spending.

Incentives paid to retailers: the IFRS 15 rule

IFRS 15 treats consideration payable to a customer as a reduction of the transaction price, and therefore of revenue, unless the payment is in exchange for a distinct good or service that the customer transfers to the supplier. If the payment is for a distinct good or service but exceeds its fair value, the excess reduces revenue. If the supplier cannot reasonably estimate the fair value of what it receives, the whole payment reduces revenue. The reduction is recognised at the later of when the related revenue is recognised and when the supplier pays or promises to pay, including a promise implied by its customary practice. See variable consideration.

A three-year exclusive supply deal with a convenience chain

A soft drinks supplier signs a 3-year agreement with a convenience store chain. It pays US$ 600 thousand upfront for exclusive supply of soft drinks in the chain's chillers; the chain commits to minimum volumes and must repay part of the fee if it ends the agreement early. The supplier also installs branded chillers costing 90 thousand that it owns and can remove, with a useful life of 5 years, and buys advertising on the chain's app for 150 thousand a year. Comparable digital advertising from other media owners would cost about 100 thousand. Gross sales to the chain are 3,000 thousand in the first year, spread evenly.

Revenue from the chain in the first year is 3,000 less 200 of the exclusivity payment and 50 of excess advertising payments, 2,750 thousand. The supplier also recognises 100 thousand of advertising expense and 18 thousand of depreciation on the chillers, usually in selling and distribution costs. At each reporting date, it checks that the remaining exclusivity asset is recoverable from the expected margin on future sales to the chain.

When can an upfront payment be an asset?

IFRS 15 does not deal directly with payments made before the related sales. In practice, suppliers recognise an asset when the payment relates to an enforceable agreement under which they expect to earn future revenue, shown by committed volumes, exclusivity or a refund if the retailer ends the deal early, and release it against revenue as the goods are sold. If the retailer makes no commitment and can stop buying at any time, there is no contract to attach the payment to, so it reduces revenue when paid or promised. Contributions to store openings and refits follow the same logic, because the supplier receives nothing distinct for them.

How are chillers and display equipment treated?

Where the supplier keeps ownership, can take the equipment back and restricts its use to its own products, the equipment is the supplier's property, plant and equipment, depreciated over its useful life, and is not a payment to the retailer at all. If ownership passes to the retailer, the supplier has no asset: the equipment is part of what it gives the retailer under the deal, accounted for either as a promised good within the supply contract or as an incentive that reduces revenue, depending on the terms. Simple cardboard displays that are used up during a promotion are usually expensed when the supplier has the right to access them. See advertising and marketing costs.

Are payments for retail media a distinct service?

Retailers increasingly sell advertising on their websites, apps and in-store screens. Because a supplier could buy similar advertising from other media owners, the advertising can be a distinct service, so the supplier can expense the payment as advertising up to its fair value, estimated from what comparable advertising costs, with any excess reducing revenue. The supplier needs evidence that it actually receives the service, such as campaign reports showing the adverts ran, rather than a payment labelled as advertising inside a joint business plan. Payments for the retailer's sales data are assessed in the same way.

How are growth bonuses and joint business plan funds treated?

Bonuses paid if the retailer's purchases grow by an agreed percentage are variable consideration, estimated from the start of the period and adjusted as the outcome becomes clearer, like volume rebates. Lump-sum funds agreed in an annual joint business plan usually pay for a mix of promotions, displays and listings with nothing distinct received, so they reduce revenue over the period of sales they relate to; any part that buys a distinct service at fair value is separated. See volume rebates to retailers.

How does the retailer account for these incentives?

For the retailer, payments from suppliers are generally a reduction of the cost of the goods it buys, recognised in cost of sales as the goods are sold, and an upfront exclusivity payment is deferred and released over the agreement. Where the retailer provides a distinct service at fair value, such as retail media advertising, it recognises revenue for that service instead. See supplier rebates and allowances.

How does US GAAP differ?

ASC 606 has the same rules on consideration payable to a customer, including the fair value limit for distinct goods or services, and practice on upfront payments is similar. Retailers apply ASC 705 to payments received from vendors, which also treats them as a reduction of cost unless they pay for a distinct good or service or reimburse specific costs. Carmakers face the same questions with dealers. See dealer incentives and rebates.

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