PREMIUM LIABILITY

CHAPTER 2
 PREMIUMS
• Are articles of value such as toys, dishes, silverware,
and other goods and in some cases cash payments,
given to customers as result of past sales or sales
promotion activities
• In order to stimulate the sale of their products,
entities offer premiums to customers in return for
product labels, box tops, wrappers and coupons
• When merchandise in sold, an accounting liability for
the future distribution of the premium arises and
should be given accounting recognition
 ACCOUNTING PROCEDURES
• When the premiums are purchased
Premiums xxx
Cash xxx
• When the premiums are distributed to customers
Premium Expense xxx
Premiums xxx
• At the end of the year, if premiums are still
outstanding
Premium expense xxx
Estimated premium liability xxx
 ILLUSTRATION
• An entity manufactures a certain product and sells it at P300
per unit.
• A soup bowl is offered to customers on the return of 5
wrappers plus a remittance of P10
• The bowl costs P50, and it is estimated that 60% of the
wrappers will be redeemed.
• The data for the first year concerning the premium plan are
summarized below.
– Sales, 10,000 units @ P300 each 3,000,000
– Soup bowls purchased, 2,000 units @ P50 100,000
– Wrappers redeemed 4,000
 ENTRIES
• To record the sales
Cash 3,000,000
Sales 3,000,000
• To record the purchase of the premiums
Premiums – soup bowls 100,000
Cash 100,000
• To record the redemption of 4,000 wrappers
Cash 8,000
Premium Expense 32,000
Premiums 40,000
• To record the liability for the premiums at the end of the first year
Premium Expense 16,000
Estimated premium liability 16,000
 COMPUTATION
Wrappers to be redeemed 6,000
(6,000 x 10,000 wrappers)
Less: Wrappers redeemed 4,000
Balance 2,000
Premiums to be distributed 400
(2,000/5)
Estimated liability 16,000
(400 x 40)
FINANCIAL STATEMENT CLASSIFICATION

• At the end of the year, the accounts related to

the premium plan are classified as follows:
Current Asset:
Premiums – soup bowls 60,000
Current Liability:
Estimated premium liability 16,000
Distribution Cost:
Premium expense 48,000
 CUSTOMER LOYALTY PROGRAM
IFRS 15
• Generally designed to reward customers for past
purchases and to provide them with incentives to
make further purchases
• If a customer buys goods or services, the entity
grants the customer award credits often described
as “points”
• The entity can redeem the points by distributing to
the customer free or discounted goods or services
• Customers may be required to accumulate a
specified minimum number of award credits or
points before they can be redeemed.
 MEASUREMENT
• An entity shall account for the award credits as a
“separately component of the initial sale transaction”.
• The granting of award credits is effectively accounted
for as a “future delivery of goods or services”.
• The fair value of the consideration received with
respect to the initial sale shall be allocated between
the award credits and the sale based on relative
stand-alone selling price.
• The stand-alone selling price is the price at which an
entity would sell a promised good or service
separately to a customer
 RECOGNITION
• The consideration allocated to the award credits is initially
recognized as deferred revenue and subsequently recognized as
revenue when the award credits are redeemed.
• The amount of revenue recognized shall be based on the number
of award credits that have been redeemed relative to the total
number expected to be redeemed.
• The estimated redemption rate is assessed each period. Changes
in the total number expected to be redeemed do not affect the
total consideration for the award credits
• The changes in the total number of award credits expected to be
redeemed shall be reflected in the amount of revenue recognized
in the current and future periods
• The calculation of the revenue to be recognized in any one period
is made on a cumulative basis in order to reflect the changes in
estimate
 ILLUSTRATION – IFRS 15
• An entity, a grocery retailer, operates a customer loyalty program.
The entity grants program members loyalty points when they spend
a specified amount on groceries. Program members can redeem the
points for further groceries. The points have no expiry date. The
sales during 2017 amounted to P9,000,000 based on stand-alone
selling price. During 2017, the customers earned 10,000 points. But
management expects that 80% or 8,000 of these points will be
redeemed. The stand-alone selling price of each loyalty point is
estimated at P100. On December 31, 2017, 4,000 points have been
redeemed in exchange for groceries. In 2018, the management
revised expectations and now expects that 90% or 9,000 points will
be redeemed altogether. During 2018, the entity redeemed 4,100
points . In 2019, a further 900 points are redeemed. Management
continues to expect that only 9,000 points will ever be redeemed,
meaning, no more points will be redeemed after 2019.
 ALLOCATION OF TRANSACTION PRICE
Product sales 9,000,000
Points-Stand-alone SP 1,000,000
(10,000 x 100)
Total 10,000,000
Product sales 8,100,000
(9,000,000/10,000,000 x 9,000,000)
Points 900,000
(1,000,000/10,000,000 x 9,000,000)
Total transaction price 9,000,000
 JOURNAL ENTRIES
• The initial sale in 2017 is recorded as follows:
Cash 9,000,000
Sales 8,100,000
Unearned revenue –points 900,000
• Redemption of 4,000 points in 2017
Unearned revenue – points 450,000
Sales 450,000
Revenue to be recognized in 2017
(4,000/8,000 x 900,000)
 JOURNAL ENTRIES
• Redemption of 4,100 points in 2018
Unearned revenue – points 360,000
Sales 360,000
Points redeemed in 2017 4,000
Points redeemed in 2018 4,100
Total points redeemed to Dec 2018 8,100

Cumulative revenue on Dec 2018 810,000

(8,100/9,000 x 9,000,000)
Revenue recognized in 2017 (450,000)
Revenue to be recognized in 2018 360,000
 JOURNAL ENTRIES
• Redemption of 900 points in 2019
Unearned revenue – points 90,000
Sales 90,000
Points redeemed in 2017 4,000
Points redeemed in 2018 4,100
Points redeemed in 2019 900
Total points redeemed to Dec 2019 9,000

Cumulative revenue Dec 2019 900,000

Cumulative revenue Dec 2018 (810,000)
Revenue to be recognized in 2019 90,000
 THIRD PARTY OPERATES LOYALTY PROGRAM

• An entity, a retailer of electrical goods, participates in

a customer loyalty program operated by an airline. The
entity grants program members one air travel point for
every P1,000 spent on electrical goods. Program
members can redeem the points for travel with the
airline subject to availability. The entity pays the airline
P60 for each point. During the current year, the entity
sold electrical goods for consideration totaling
P4,500,000 based on stand-alone selling price and
granted 5,000 points with stand-alone selling price of
P100 per point.
 COMPUTATION

• The entity has fulfilled its obligation by granting the

points. Therefore, revenue from points is
recognized when the electrical goods are sold
 JOURNAL ENTRIES
• To record the initial sale
Cash 4,500,000
Sales 4,050,000
Revenue from points 450,000
• To record payment to airline
Loyalty program expense 300,000
Cash 300,000